What You Should Know About Revocable Living Trusts in Arizona

1.     What is a Revocable Living Trust? 

A Revocable Living Trust is a popular alternative to the traditional Will as the main component of an estate plan.  The Revocable Living Trust is best known as a probate avoidance tool.  Assets titled in the name of a Revocable Living Trust bypass the court-supervised probate process upon the death of the owner.
 
A fully-funded Revocable Living Trust has other potential benefits including (1) comprehensive incapacity planning; (2) simpler coordination of beneficiary designations for life insurance and retirement accounts; and (3) enhanced privacy from excluded heirs and the general public.
 
There are many types of trusts.  A revocable trust can be changed, or even cancelled, as opposed to an irrevocable trust that cannot.  A living trust is established during the owner’s lifetime, as opposed to a testamentary trust established after the owner’s death.

2.     How does a Revocable Living Trust work?

A trust is established with at least one trustor, trustee, and beneficiary.  The trustor is the person who establishes the trust.  The trustee manages the assets of the trust for benefit of the beneficiary.  Most Revocable Living Trusts will initially name the trustor as both trustee and beneficiary.    
 
A Revocable Living Trust is like a bowl of candy.  If you establish a trust, you are choosing to hold your candy (assets) in a bowl, rather than in your hand.  If you become incapacitated or resign as trustee, your bowl will be given to the successor trustee, who will distribute the candy to you as needed.  After your death, the successor trustee will take enough candy from the bowl to pay debts and expenses, and then distribute the remaining candy to the persons or charities named as beneficiaries in the trust document.
 
A Revocable Living Trust must be fully-funded to achieve its objectives.  This means that you will need to re-title ownership of your personal assets (e.g., real estate, CDs, bonds, brokerage accounts) into the name of your trust.
 
A Revocable Living Trust is tax neutral during the lifetime of the trustor.  Any taxable income earned by assets of the trust is reported on the trustor’s personal income tax return.           

3.     Who should have a Revocable Living Trust?

Many people mistakenly assume that the Revocable Living Trust is only for the very wealthy.  However, in Arizona, a probate action is possible whenever a person dies with more than $100,000 of equity in real estate or more than $75,000 in personal property (and there is no surviving joint owner and no beneficiary designation is used).  Anyone with assets titled in personal name valued higher than these amounts should consider the potential benefits of a Revocable Living Trust versus the costs and hassle of establishing one.
 
The best candidates for a Revocable Living Trust are:

• Persons with home equity or non-retirement investments far exceeding the minimums that trigger probate ($100k/$75k)
• Persons wishing to restrict or protect inheritance for an intended beneficiary
• Persons with mental health concerns based on a personal diagnosis or family history
• Persons wishing to disinherit a potential beneficiary, or when privacy is important
• Persons owning property in multiple states
• Small business owners, especially if business operations would continue after the owner's death

4.     How is a Revocable Living Trust superior to a Financial Power of Attorney?

If a trustor has an extended incapacity, a fully-funded Revocable Living Trust is more reliable than a Financial Power of Attorney.  When incapacity strikes, the “disability trustee” can quickly take control of the trust assets without any court involvement.  The same sense of confidence cannot be placed in a Financial Power of Attorney because financial institutions are often reluctant to rely on them.  Financial institutions may assert that the Power of Attorney is “stale” or refuse to accept any document that does not conform to the financial institution's proprietary form.  A well-drafted Revocable Living Trust document will provide clear provisions describing the triggering events after which a successor trustee can manage trust assets on behalf of the trustor. 

5.     How much does a Revocable Living Trust cost?

A Revocable Living Trust is usually two or three times more expensive than a Will primarily because of the increased value and benefits it provides.  Estate planning lawyers in Arizona typically charge $2,000 to $10,000 for a Revocable Living Trust-based estate plan.  The exact amount will depend on many factors, including whether the estate plan incorporates estate tax savings and inheritance protection features, and the attorney's knowledge and experience.