A Revocable Living Trust, also simply called a Living Trust, is a legal document that is created by an individual, called a Trustmaker, to hold and own the Trustmaker's assets, which are in turn invested and spent for the benefit of the Trustmaker as the Beneficiary by a Trustee. In most cases, the Trustmaker will also be the Trustee, although some wealthy individuals may choose to have an institution manage their trust property.
A Revocable Living Trust covers three phases of the Trustmaker's life - while the Trustmaker is alive and well, if the Trustmaker becomes mentally incapacitated, and after the Trustmaker dies.
Phase One of a Revocable Living Trust: The Trustmaker is Alive and Well
While the Trustmaker is alive and well, the trust agreement will have specific provisions allowing the Trustmaker to manage, invest, and spend the trust assets for his or her own benefit. Thus, the Trustmaker will go about business as usual with regard to assets that have been funded into the trust, except that the Trustmaker will sign as the "Trustee" instead of as an individual. The Trustmaker will also be able to use his or her own Social Security Number as the taxpayer identification number for the trust and file income taxes on IRS form 1040 instead of form 1041.
Phase Two of a Revocable Living Trust: The Trustmaker Becomes Mentally Incapacitated
The trust agreement will also specify one or more procedures to be followed if the Trustmaker becomes mentally incapacitated. If the Trustmaker is determined to be mentally incompetent and can no longer properly serve as Trustee, then the trust agreement will name a successor "Disability Trustee" to take over the management and investment of the trust funds from the Trustmaker. The Disability Trustee will then be able to take care of and manage all of the Trustmaker's finances (assuming all of the Trustmaker's assets have been funded into the trust) and pay the Trustmaker's bills.
Phase Three of a Revocable Living Trust: The Trustmaker Dies
When the Trustmaker dies, the 'Administrative" or "Successor Trustee" will be able to step in and pay the Trustmaker's final bills, debts, and taxes. The trust agreement will then contain instructions about who will receive the balance of the trust funds after all of the bills have been paid and the Administrative Trustee will distribute the balance accordingly.
How a Revocable Living Trust Avoids Probate
Since the assets funded into a Revocable Living Trust during the Trustmaker's lifetime will no longer be owned by the Trustmaker but by the Trustee of the trust, there will be no need for the trust assets to be probated when the Trustmaker dies. Instead, the Administrative Trustee can proceed with settling the trust outside of probate and without any court supervision or interference.