Revocable Living Trusts: Protection Beyond Probate

This key estate planning document not only avoids probate at your death, but can protect your assets during your lifetime if you become incapacitated or vulnerable to elder abuse.

A revocable living trust is a key estate planning document. It is commonly used for probate avoidance, but can also play an important role in protecting your assets if you become incapacitated or vulnerable to scams, financial exploitation and other forms of elder abuse.

Indeed, an estimated one in 10 Americans over age 60 experience elder abuse in the form of financial exploitation. Trusted family and friends are by far the most likely perpetrators, with adult children and spouses accounting for two out of three cases.1 The U.S. Consumer Financial Protection Bureau estimates the cost of this abuse of older Americans in the range of $2.9 billion to $36.5 billion a year.  

How a Revocable Living Trust Works

Your revocable living trust is a separate legal entity created to own your property. You (the grantor) create it by signing a trust agreement naming an individual or corporation as trustee during your lifetime. Grantors often start by naming themselves as trustee, and designating successor trustees or co-trustees who will act upon their death or incapacity. Your choice of trustee(s) is critical to your protection from potential financial abuse as you grow older.

You transfer your property (investments, real estate, etc.) into your trust by changing the ownership title on these assets from you personally to the name of your revocable living trust, and your trustee manages the assets according to the terms you set forth in your trust document. At your death, the trust assets pass to whomever you have designated as beneficiaries, either outright or continuing in trust for them. See Exhibit 1.

Exhibit 1: Asset Flow of a Revocable Living Trust

A revocable living trust offers several key benefits:

Avoids probate: Assets passing to beneficiaries by trust are not subject to probate, unlike assets passing under terms of a will. Probate procedures vary by state, but typically add costs and time in getting assets to beneficiaries.

The probate process involves several fees, the bulk of which are attorney and court fees. These increase if an estate is large, complex or is disputed by the heirs. Probate costs typically range between 3% and 8% of the total value of the estate.

Probate involves numerous steps to move assets from the ownership of a deceased individual into that of a living beneficiary. This is supervised by the court, which adds potential delays of a few months up to a year or longer and is a matter of public record. Alternatively, if you have established and funded a revocable living trust, distributions to your beneficiaries can usually be made quickly, cost-effectively and confidentially. The privacy afforded by having placed your assets in your revocable trust during your lifetime is an increasingly attractive benefit in today’s world of social media.

Avoids court-supervised conservatorship or guardianship: Wth a funded revocable living trust you can avoid a court-supervised conservatorship (or guardianship, as it is called in some states) should you become unable to manage your trust assets for any reason. Upon incapacity, your co-trustee or successor trustee can immediately take over control and continue managing your assets with little or no lapse in between.

Alleviates elder abuse concerns: When setting up your trust, you can add a corporate co-trustee to help oversee your assets as you age. If you are later no longer fully able or inclined to manage your financial affairs, the corporate trustee may become sole trustee, adding a layer of protection and financial oversight to insulate you from financial exploitation. Given the growing incidence of elder abuse, particularly on the part of family members, the benefits of naming an experienced, objective trust company as a co-trustee or successor trustee are compelling.

Considerations

Before you set up a revocable living trust, there are a few important points to consider:

Does not save taxes: Though your revocable living trust is a separate legal entity, it is not a separate taxpayer during your lifetime. You are considered the legal owner of the trust assets for income and estate tax purposes. All income and expenses flow through to you and must be reported on your personal income tax return. The assets in your revocable living trust are included in your estate for estate tax purposes.

Creditor protection: Since you are deemed the owner of the assets held in your revocable living trust, these assets are reachable by your creditors.

Asset titling: Once a revocable living trust is established, the title of assets must be changed to reflect the trust as the owner of those assets. The terms of a revocable living trust can only control assets that have been transferred into it. Assets that are held outside of your trust will typically be transferred upon death through your will, but those assets will not avoid the probate process and will not be afforded the protection that a revocable living trust would provide in the event of incapacity or potential abuse.

Protecting our clients’ assets is one of the pillars of our Active Wealth approach. With over 200 years of trustee experience, BNY Mellon Wealth Management administers trusts for grantors throughout the world. At BNY Mellon, your team will work with you and your outside advisors to determine the appropriate estate structure for your individual needs.

  • 1. National Council on Aging, “Elder Abuse Facts” and National Institutes of Health, “Elder Mistreatment – Abuse, Neglect, and Exploitation in an Aging America.”

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