A revocable living trust can be an ideal estate planning mechanism for individuals who want to reduce risk and uncertainty in their financial future. A revocable living trust can allow assets to avoid probate, and it can also guide financial management in the event the trust creator is incapacitated.
These qualities collectively make a revocable living trust extremely helpful to family members, too.
New Mexico Financial & Family Law wants to see you and your family thrive despite all the uncertainty the future may bring. While none of us can predict what will happen tomorrow — let alone in a few years — we can create beneficial trusts now to make us feel more secure and in control of our finances.
If peace of mind is what you are after, reach out to a New Mexico revocable living trust lawyer today to discuss your options for estate planning. Schedule a consultation with our experienced attorneys when you call 505-503-1637 or contact us online.
A revocable living trust can accomplish many different goals. Collectively, all of the benefits give the trust creator and their family increased financial certainty, effects which can last long after the trust creator passes on.
Not every family needs to have a revocable living trust in place, but it may make sense for you if you want to accomplish any of the following:
On the other hand, you may want to consider a different type of estate planning instrument if your goals are to protect assets from creditors, reduce estate and gift taxes, or help a loved one obtain support without invalidating their eligibility for needs-based programs.
Working with an experienced living trust attorney at New Mexico Financial & Family Law can help you understand all of the options available to you. Your goals are the most important factor in our recommendations, so we always listen closely to our clients and provide tailored solutions to help those goals come to fruition.
A trust is a recognized legal entity that serves as the official owner of any property it contains.
To create a trust, the original owner of the property — known as the grantor or settlor — transfers their property into it. They designate a trustee to oversee the management of the property as well as its distribution to any named beneficiaries.
There are some qualities that make a revocable living trust unique, all of which can be found in their name:
The biggest functional difference between a testamentary trust and a living trust is that a living trust preemptively removes assets from the grantor’s estate during their lifetime.
Because the property is technically owned by the trust and not the grantor’s estate, it can be omitted from the probate process.
Probate is a court procedure where a deceased person’s will and the contents of their estate are reviewed by the court. The representative of the estate (sometimes called the executor) is in charge of ensuring that all fees are paid, all creditor claims are handled, and all objections to the will as written are considered.
Distributions (i.e., inheritances) are only handled after the process is completely over.
While, in most cases, probate can be handled without substantial effort, it still adds to the time and expense required to manage an estate. Beneficiaries may wait more than a year before they can claim their inheritances.
In the meantime, creditors and competing heirs have the right to file claims on assets held in the estate.
If a dispute about claims arises during probate, the estate representative will be caught in the middle, and they will likely need to hire an attorney to manage the dispute — spending from the estate and diminishing its value in the process.
Trusts require their own amount of time, effort, and expense to set up, however, so consider the value of a revocable living trust with the guidance of an attorney to ensure that they can provide a net benefit to the family.
An irrevocable trust is “set in stone” once it is funded and created. In most cases, it can only be changed if all of the named beneficiaries agree to a proposed change. Other times, it can never be changed at all.
A grantor can often name themselves as a trustee, a beneficiary, or both in an irrevocable trust. So, even though the trust language cannot be changed, the grantor may have the ability to manage it in a way that they find acceptable even if unexpected complications arise.
Many types of irrevocable trusts don’t allow for this level of flexibility, though. The grantor may be forced to completely separate themself from the property in order to achieve the intended goals of the trust.
By comparison, a revocable living trust can be altered or dissolved (i.e., revoked) by the grantor at any time while they are alive. When the grantor passes, the right to alter the trust may be passed on to a trustee or certain beneficiaries if designated by the trust’s language.
Otherwise, the trust basically becomes irrevocable.
So why would a grantor ever want to create a trust that they can’t change? Simple: putting assets into an irrevocable trust permanently removes them from the grantor’s ownership in most cases.
Having a separate owner can protect the assets from creditor claims, and it could also lead to savings on estate, gift, or generation-skipping transfer taxes.
In sum, an irrevocable trust is less convenient and possibly risky because it cannot be altered, but it can create tempting asset protections and tax savings because of this status. On the other hand, a revocable living trust is more convenient and controllable, albeit without some of the advantages an irrevocable trust provides.
A revocable living trust designates the income generated from its assets as the personal income of the grantor. In other words, the grantor pays income taxes on all proceeds from the contents of the trust.
For example, some trusts pay dividends or regularly shuffle around assets (e.g., selling some stocks and buying others) to create an income stream for beneficiaries. The grantor reports all of this income on their annual individual tax return.
They may also be required to pay capital gains on the proceeds of the sale of certain assets, including sales of any real property held in the trust.
After the grantor dies, the assets held in the trust are all subject to federal estate taxes (New Mexico does not have its own estate tax). So, even though the assets held in a revocable living trust count as separate from the estate for probate purposes, the IRS still designates them as estate contents when calculating taxes.
The revocable living trust becomes responsible for paying its own taxes on income after the grantor’s death. The trustee should separate the finances after the date of the grantor’s death since a trust has to file its own tax return and establish a unique taxpayer identification number (TIN).
The grantor can designate anyone as a trustee. They should pick someone who they believe will be capable of managing the trust responsibly while dealing with any complications should they arise.
A trustee can be a family member, but often they are a bank, law firm, accounting firm, or other professional services provider. The grantor can also designate themself as a trustee during their lifetime, appointing someone else as co-trustee in the event they die or are medically unable to manage the trust effectively.
It is wise to designate a series of possible trustees if one cannot serve or decides they do not want to.
The language of the trust should make it clear what the trustee is expected to do, including guidance on an investment strategy to create trust income and instructions on making distributions of trust property to beneficiaries.
Someone who doesn’t have the ability to make sound decisions about important life matters is considered medically incapacitated. Incapacitation can happen when the person slips into a coma, for example, or if they no longer possess the mental faculties needed to take care of their own finances because of a condition like dementia.
With a revocable living trust, someone will already be designated to take over when the grantor is incapable of doing so. The trust language makes this transition seamless, in most instances, without the need for court intervention.
Without a trust, the property owner would have to draft a durable financial power of attorney document designating an agent to make decisions on their behalf. If the property owner neglected to make such a document, then anyone who wanted to manage their finances on their behalf would likely have to obtain permission from the court through a process known as appointing a conservator.
Getting a conservatorship can be a lengthy, expensive process — one with no guaranteed outcome. Having a trust in place ensures, in most cases, that loved ones can have their trust finances managed by a reliable trustee without needing to go through this cumbersome process.
From the moment a loved one dies, their estate entails a new set of responsibilities. The death can also give rise to many unanswered questions, even if the decedent wrote a detailed will.
With a revocable living trust, the property is already held in the trust at the time of the decedent’s death. The representative of the estate does not need to worry about it, since a trustee will already be in place to manage the assets for them.
Even if the trustee and the estate representative are the same person, their job in managing the trust will likely be easier than navigating probate.
Perhaps even more beneficial, the contents of the trust can stay intact. If the trust was used to generate investment income, that activity can continue without disruption.
An estate, by comparison, may require that the assets be sold before the appropriate value is transferred to beneficiaries. Pressures from competing claims or relatives disagreeing on matters like who gets to use property can make matters even more complicated.
Trusts keep this property separated. The trust can also hang onto the property for a number of years before liquidating assets and transferring the remainder value to beneficiaries.
This delayed inheritance is especially common for families where the heirs may be minor children who are not yet ready to manage the money responsibly.
A revocable living trust can be the perfect estate planning instrument for your goals if you want to put property and investment assets somewhere they can be securely managed well into the future. A skilled New Mexico trust attorney can help you navigate the process.
If your goals include estate tax reduction, asset protection, or other intentions, we can help you figure out the perfect type of trust to accomplish those, too. Your revocable living trust can even be converted into a different trust at certain times, including upon your death.
We at New Mexico Financial & Family Law are excited to help you decide on the best future for your assets and your loved ones. Give us a call at 505-503-1637 or contact us online to schedule a case review and discuss your goals with an experienced New Mexico revocable living trust attorney.
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