The Four Phases of a Revocable Living Trust

Sometimes the best way to understand a concept is to break it down into different phases over time. I think this construct works well for understanding estate planning with a revocable living trust, which serves varying goals and purposes at each different stage.

For a basic primer on revocable living trusts, read here. The four basic phases of a revocable living trust are:

Phase 1: Alive and Well

Upon trust creation, the maker of the trust (called grantor or settlor or trustor) will generally name themselves as the initial trustee and beneficiary with full control over the trust and its assets. The grantor transfers assets into the trust and basically deals with the trust assets just like assets in his or her own name — spend, invest, gift, etc. A grantor trust is taxed directly to the grantor under the grantor’s SSN. No change.

That sounds all well and good, but at this stage seems pointless. But this first phase is not the reason that the trust is created and funded. That would be the next three phases…

Phase 2: Alive but not Well

The trust will provide for your designated successor trustee to take over management of the trust when you are no longer able to do so yourself. During your lifetime, that could happen either by your resignation as trustee, or if you are unable to manage your financial affairs as determined under the trust’s terms. In either case, your successor trustee takes over management of the trust under the express terms of the trust.

In most cases, the successor trustee will be instructed to manage and use trust assets for your benefit, and sometimes for the benefit of your spouse and/or dependents. In this situation, the use of a trust for asset management during incapacity can serve as an efficient substitute for a judicial finding of disability with a court-appointed and monitored guardian.

Phase 3: Post-Death Administration Without Probate

Most people are aware that after the death of the grantor the trust, and its assets, is not subject to probate. Avoiding probate generally allows your designated fiduciary and beneficiaries quicker and easier access to the assets. If real property is held in multiple jurisdictions, ownership in trust avoids multiple court proceedings. While probate administration is public, trust administration is private.

Phase 4: Ongoing Trusts Benefiting Beneficiaries

The final phase is where trusts really shine. Your trust can survive your death and continue for whatever period of time may be appropriate for the benefit of your beneficiaries. There are a myriad of situations that call for an ongoing trust with terms tailored to meet your beneficiaries’ needs and best interests. Some of these situations include:

• Managing funds for minor beneficiaries (for example: pot trusts)
• Managing an inheritance for young or spendthrift adults not ready to inherit large sums
• Preserving and managing funds for special needs or disabled beneficiaries
• Protecting assets for beneficiaries with creditor or marital issues
• Estate and generation-skipping tax minimization
• Providing for spouses and children from blended marriages
• Managing complex or legacy assets, such as a family business or vacation home
• Achieving charitable goals

If you are interested in how an Illinois revocable living trust might help to meet your family’s estate planning needs, call us at (847) 991-2250 to discuss.

“Phases of the Moon” image courtesy of Flickr Creative Commons