January Question – I just signed my Revocable Living Trust and feel pretty good knowing my assets are protected!
RLG’s Attorney Answer – Not all trusts are “built” alike and unfortunately, your Revocable Living Trust, although excellent for many things (and there will be more on that in the months to come), will not protect your assets.
The best way to understand trusts is that there are two primary types of trusts – Living Trusts (those created during your lifetime) and Testamentary Trusts (those that are created upon death). However, Living Trusts can be further divided into Revocable Living Trusts (RLTs) or Irrevocable Living Trusts. And, know that all testamentary trusts are automatically irrevocable – otherwise what would be the point of someone saying in their Wills that they want their loved ones to inherit in trust upon that someone’s death, if the loved one can go ahead and change it. That would defeat the purpose of that someone’s objectives wouldn’t it?
By virtue of its name, all Irrevocable Trusts offer some type of asset protection – either from the IRS (for death tax purposes) or from creditors & predators of a beneficiary. So if Irrevocable Trusts are like vaults or treasure chests, Revocable Living Trusts are really like “Cookie Jars” – those glass jars on the kitchen counter – transparent, easy to access, and perfect for managing your sweet assets during your lifetime. However, people often mistake the cookie jar for a vault. The term “trust” creates this illusion of impregnability, leading many to believe that any trust, including RLTs, have a high-security protection.
The charm of RLTs lies in their revocable nature – like a lid you can lift anytime to add or remove cookies. It’s great for sole control and flexibility, but this very feature makes the contents vulnerable to outside hands, unlike the sealed vault. Your assets in an RLT are more like cookies where you can put your hand in to get your cookies out and legitimate creditors can take a bite as well if they wish.
Conclusion: RLTs are nothing more than Will substitutes and both RLTs and Wills can have language within them to set up testamentary trusts for their loved ones upon death. Its only Irrevocable Living Trusts set up during the lifetime of someone that can get assets out of his or her estate to save on estate taxes or provide asset protection during the lifetime of that person. RLTs are effective during lifetime and when assets are in them, they can be convenient, flexible, and perfect for daily use. However, mistaking them for impenetrable vaults might leave you with a trail of crumbs.