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Why Are Revocable Living Trusts and Last Wills Often Confused?
Whether you choose to use a Revocable Living Trust (RLT) or a Last Will and Testament (Last Will) to administer and distribute assets according to your estate plan, remember that both are governed by state laws that vary from one jurisdiction to the next. Creating a RLT in one state may have different requirements from the same RLT in another state. A Last Will valid in one state may be invalid and susceptible to challenges in another state. For example, not all states accept handwritten Last Wills. In the end, however, these estate planning “tools” are often confused because both are used at death to provide an orderly administration of a decedent’s estate for the benefit of their loved ones.
Beyond That, the Two Are Entirely Different and Equally Important Parts of an Estate Plan.
A RLT is a legal entity that owns assets, providing the grantor creating the trust (also known as a trustmaker, settlor, or trustor) with a high level of control during and after his or her lifetime. As soon as the grantor signs and funds the RLT, it is activated. A variety of assets may be placed in the RLT, including real estate, investment accounts and personal property. The grantor of a RLT may also serve as the initial trustee, who may manage, add or subtract assets held in the RLT. Beneficiaries and the terms of the trust can also be changed by the grantor at any time. It is a good idea to name a successor trustee to replace the grantor/trustee upon disability or death with little or no court involvement.
When the grantor dies, the RLT becomes an Irrevocable Trust (IT) and assets are transferred by the trustee to beneficiaries. Assets held in an IT are not subject to probate, which is why trusts are popular tools for estate planning.
The RLT (and later the IT) assets and the directions for their distribution or management are private and confidential. The only individuals who may see the trust are the trustees, unless otherwise required by state law.
How Does a Last Will Distribute Assets?
A Last Will, more formally known as a Last Will and Testament, is a legal document containing instructions for disbursement of assets. It becomes active only after the person who made the will, the testator (or testatrix, if female), dies. The Last Will names an Executor (or Executrix, if female) responsible for carrying out directions in the Last Will, which also can nominate a Guardian for minor children.
Assets distributed through a Last Will are subject to probate. The Executor (or an estate attorney on the executor’s behalf) submits the Last Will before to the probate court, which reviews the Last Will to ensure that it is the “Last Will” (and not the “Second to the Last Will) in compliance with state law. This can take anywhere from several months to several years, depending on the complexity of the estate and the jurisdiction.
The Last Will becomes part of the public record and can be seen by anyone who is interested enough to make the effort. When the Last Will has been deemed valid, the Executor begins the process, by applying for an Estate Tax Identification Number (EIN), opening an estate account to identify and consolidate assets, notifying heirs and family members, paying lawful debts, taxes, and expense and eventually distributing the assets when the judge officially closes the probate estate.
Estate Planning with a RLT or a Last Will
Although we have been reviewing the differences between estate planning with a RLT and a Last Will, many estate plans include both. For example, the Last Will may be used in the probate court to nominate a Guardian for orphaned minor children and a RLT to avoid subjecting their inheritance to public disclosure in the same probate court. It is essential to use the right estate planning “tools” to accomplish your unique estate planning objectives.
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