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Louisiana Revocable Trusts Explained:

A revocable trust is a type of living trust that you can create during your lifetime and as such is an important estate planning tool.  It is essentially a contract reflecting an agreement regarding the passing of property from one to another.  The grantor (or settlor) maintains ownership and full control over the assets in the revocable trust while he or she is still alive.

Per La. R.S. 9:2022, “reservation of the right to revoke includes the right to modify the trust.”  Per La. R.S. 9:2042, “a reservation by the settlor of the right to revoke includes the right to revoke the interest of any beneficiary, unless otherwise limited by the trust instrument.”

The grantor is most often also the initial trustee.  The trustee’s job is to manage the assets that the grantor places into the trust.  A Beneficiary is the recipient who will at some point inherit the remaining trust property.  The trust document will name who the initial grantor(s), trustee(s), and beneficiary(ies) are, and their successors.

The difference between a revocable trust and an irrevocable trust is that a revocable trust can be changed or revoked, and an irrevocable trust cannot be changed or revoked once created.  In order to change a revocable living trust, the grantor can simply have an amendment drawn up and added to the original trust document.  Revocable living trusts are very flexible and can be ideal in many circumstances such as probate avoidance.  Irrevocable trusts may be unfavorable in many instances due to the loss of control over the trust assets.  Both have certain advantage and disadvantages.

Advantages of Revocable Trusts:

Probate Avoidance:

A revocable living trust is most often used to allow beneficiaries to receive their inheritance directly, without going through the time and expense of succession proceedings.  It must be properly funded and maintained though.  Cost savings should not be the number one consideration though.

Many people think that creating a revocable trust is cheaper than going through probate.  However, it really depends on the circumstances.  If your succession will need to be placed under administration or if multiple successions will be necessary because of marriage or ownership of out-of-state real estate, then a revocable trust will likely save money.  However, if a single simple succession is all that is likely needed, then there likely will not be any cost savings.

Many people also think that immediate access to assets is a big perk.  However, if a will appoints an independent executor, then the executor may sell, lease, or otherwise dispose of assets of the succession without having to obtain court authority.  Once qualified as an independent executor, real estate and other assets can be sold without having to petition the court for authority.

Privacy:

Living trusts, whether revocable or irrevocable, offer privacy that wills and testamentary trusts do not.  A will or testamentary trust must be filed in the court record of a succession proceeding which makes it public record capable of being viewed by anyone.  A living trust document, on the other hand, is not filed in a succession record, thus, the terms and assets within it remain private.

However, if the trust will own immovable property, the trust must be recorded in the conveyance records of the parish in which the immovable property sits.  Fortunately, when transferring title of immovable property (or real estate) a simple “extract of trust” can be recorded in the conveyance records rather than the entire trust document.  This will transfer title of that particular property while the remainder of the trust terms remain private.

Capacity:

A revocable living trust can be a useful tool to help manage assets and finances for the elderly or those with diminishing capacities.  A revocable trust allows the grantor to appoint a trusted family member or friend to be the successor trustee once the grantor is no longer able to serve as his or her own trustee.  Essentially, the grantor remains in control as long as he or she can, then a trusted family member or friend can step in the manage the assets and finances.  This allows the grantor to choose who will manage their affairs. 

This is often accomplished with a general power of attorney, but a trust is a much more powerful tool and more widely accepted by financial institutions.  If the grantor’s estate can benefit from a revocable trust anyway, then using a trust to accomplish this goal is preferred.

Preventing Conflict:

Revocable living trusts can be useful in preventing disputes.  If a grantor foresees that in-fighting will be likely among his or her heirs, then a revocable trust may be advisable.  This is because a will can be challenged up to five years after the succession is filed.  In contrast, the clock for challenging a living trust begins when the trust is created.

On the other hand, the lack of court supervision provided by probate avoidance can be viewed as a negative and potential for causing challenges among heirs.

Disadvantages of Revocable Trusts:

Asset Protection:

Revocable living trusts do not provide asset protection from creditors.  Since all the assets of a revocable trust are available to the grantor at any time and for any reason, the assets are also available to satisfy creditors.  An irrevocable trust must be created in order to provide protection from the grantor’s creditors.

Medicaid:

Medicaid is considered a creditor for estate planning purposes.  Because the grantor can take back assets of a revocable trust at any time and for any reason, all the assets contained in the trust are countable for Medicaid purposes, which may prevent the grantor from qualifying for Medicaid.  Creating a revocable trust does not start the five-year lookback period for Medicaid qualification.  Again, an irrevocable trust is needed in order to start the five-year lookback period.

Trust Funding:

In order to avoid probate, creating a revocable trust is not enough.  Assets must be transferred to the trust.  This process entails re-titling property and is referred to as “trust funding.”  The downfall is that it can be easy to forget to transfer some assets, especially those that are acquired after creation of the trust.  If this happens, the assets that are no placed into the name of the trust must go through probate, which means any cost saving motivation is now a waste.

A “pour-over” will should be created just in case this happens so that any such assets can be placed into the trust afterwards.  A pour-over will is still subject to probate, but it can help your estate executor transfer any assets not already in your trust into the trust’s control, even after you have died.

Further, non-probate assets such as life insurance and retirement accounts can also be used to fund the trust.  These types of assets are transferred by beneficiary designation rather than through probate.  It is relatively easy to change the beneficiary to the trust, but easily forgotten.  Another important consideration when funding a trust with non-probate assets is whether they will place the estate over the Federal estate tax exemption.

Complexity:

Creating a revocable living trust can be much more expansive than a simple will.    Because of this, it is also more expensive than a will or testamentary trust.  Further, managing a trust requires ongoing paperwork and record keeping, which can be burdensome and time-consuming.  The upfront fees with respect to a trust when added to the work that still needs to be done after death make the costs higher than a will and sometimes even higher than a succession.

Taxes:

Unlike an irrevocable trust, a revocable living trust does not offer direct tax advantages.  This is again due to the fact that the assets remain available to the grantor.  Therefore, the assets are considered part of the grantor’s estate for income tax purposes and for estate tax purposes.  Further, for purposes of capital gains taxes, utilizing a revocable trust may prevent the benefit of a step up in tax basis that heirs receive when property goes through probate.

New Orleans Estate Planning Attorneys:

We are a Gretna law firm that has served the New Orleans area since 1980.  Our estate planning lawyers are well versed at creating revocable trusts.  We can analyze your circumstances to determine whether a revocable trust is right for you and help guide you through the process.  We take pride in offering a personal and trusted experience.  Call us today for a free consultation and find out why so many of our clients come back to us.

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