Estate Planning 101 (Part 3)

Key Points

  • A Trust (as opposed to a Will) is designed to protect your assets and to transfer your wealth without letting the courts take over, and dramatically slow down the process.
  • These days the estate tax threshold is so high, not many Americans need to worry about it.
  • A Revocable Living Trust (as opposed to a Irrevocable Trust) allows a seamless transfer of assets to heirs, but still gives you control to make changes as you see fit.

Now that we’ve explored some key differences between Wills and Trusts, and we’ve covered some important terminology, let’s look into why a Revocable Living Trust might make sense for you.

Trust in Thy Self

When someone passes away, society needs a way to figure out what to do with all of the deceased person’s (i.e., the decedent’s) assets. The assets and liabilities (including real and personal property) left by a decedent is known as his or her estate. And when a decedent dies without a Will or Trust, things can get a bit complicated. After all, how is society supposed to figure out what do with an estate if a clear picture of the decedent’s intentions do not exist?

That’s where Wills and Trusts come into the picture. A Last Will and Testament is a legal document that outlines the wishes for the administration and division of an estate after passing. However, a Trust goes even further than a Will. A Trust clearly defines what happens to a decedent’s assets so that his or her beneficiaries may obtain their rightful claim to said assets without the need to get the courts involved through the probate process. Further, as we established in Part 1, having a Trust can not only help an estate navigate legal hurdles, but also a Trust can help an estate navigate tax hurdles as well. We’ll explore these additional benefits of a Trust in more detail later in this post.

A trust is a separate legal entity a person sets up to manage his assets. Trusts are set up during a person’s lifetime to assure that assets are used in a way in which the person setting up the trust deems appropriate. Once assets are placed inside a trust, a third party, known as a trustee, manages them.


The trustee must manage the trust in accordance with the guidelines laid out when the Trust was formed or last updated. And the person who creates a Trust is known as a grantor (this would be you). The Trust is designed to ensure a grantor’s wishes and desires are carried out as he or she intends.

Death. And Taxes.

A Revocable Living Trust can save you time and money, as well as provide you with added control over your assets. But why a “Revocable” Living Trust; after all, there are may flavors of Trusts, right?

Let’s begin with outlining the two key types of Trusts; first there’s the Revocable Trust (a.k.a. a Revocable Living Trust, or simply a Living Trust); and then there’s the Irrevocable Trust. The owner of a Revocable Trust may change its terms at any time (this is a good thing!). He or she can remove beneficiaries, designate new ones, and modify stipulations as to how assets within the Trust are managed (Investopedia). The terms of an Irrevocable Trust, in contrast, are set in stone the minute the agreement is signed. Except under exceedingly rare circumstances, no changes may be made to an Irrevocable Trust.

From this, it seems obvious why a Revocable Trust is sensible (it gives more control to the grantor); but why then have a Irrevocable Trust? After all, wouldn’t a grantor want to retain control over his or her assets for as long as possible?

You guessed it. It all comes down to taxes.

The main reason to select an Irrevocable Trust structure is taxes. Irrevocable Trusts remove the assets from the benefactor’s taxable estate, meaning they are not subject to estate tax upon death, and they also relieve the benefactor of tax responsibility for any income generated by the assets.

Estate taxes are a big deal, but not to most people (as we’ll see). The top estate tax rate is 40%, which is a sizeable amount. But this tax only applies to estates that are larger than the estate tax exemption amount established by the federal government. And in recent history, the amount exempted from estate taxes has been quite high (See Table 1).

YearEstate Tax ExemptionTop Estate Tax Rate
2010$5,000,000 or $035% or 0%
Table 1. Estate Taxes Over Time

In fact, in 2020, estates with less than $11.58 million might not have to pay any federal estate tax (Table 1). And that’s if you are unmarried. For couples, that amount is doubled, meaning a married couple with an estate valued less than $23.16 million could pay zero in estate tax.

So if your estate is close to or above the limits mentioned in the paragraph above, an Irrevocable Trust may make sense. Indeed, an Irrevocable Trust can help decrease the size of a grantor’s estate to reduce the impact of estate taxes. But if estate taxes are not a concern it might make for sense for a grantor go with a Revocable Trust so that he or she may maintain control of his or her Trust up until death.

Many years ago, when the threshold for estate taxes was much lower, Irrevocable Trusts where much more common. But since 2018, such Trusts are no longer as important. In fact, in 2018, only 1,900 of the estimated 2.7 million people who died that year were subject to such an Estate Tax (Tax Policy Center). Of course, laws can always change, but until they do, a Revocable Living Trust is likely the way to go for most people.

One last thing to consider is that may states also tax estates as well. And although the estate tax rate is lower at the state level, so is the threshold for exemption. Indeed, this is another reason why retirees choose to relocate to states like Florida, which is one of 32 states that will not collect an estate tax as of 2020. Look here to see how your state stacks up.

There are options that will allow you to keep a Revocable Living Trust, but still mitigate estate taxes (both federal and state), such as the addition of a Disclaimer Trust; however, this is where things can get more complicated and individualized, so we’ll have to save this concern for a later discussion. Even so, given that state laws are so varied and ever changing, if you live in a state with an estate tax, it’s best to consult with a professional about your specific situation if such taxes are a concern for you.

A Trust You Can Trust

In summary, a Revocable Living trust can avoid the public, costly and time-consuming court processes at death (probate) and incapacity (conservatorship or guardianship). It can let you provide for your spouse without disinheriting your children, which can be important in second marriages. And it can protect inheritances for children and grandchildren from the courts, creditors, spouses, divorce proceedings, and irresponsible spending.*

A Revocable Living Trust is a legal document that, just like a will, contains your instructions for what you want to happen to your assets when you die. But, unlike a will, a living trust can avoid probate at death, control all of your assets, and prevent the court from controlling your assets if you become incapacitated. And as we have discussed above, a Revocable Living Trust allows the grantor to remain in control of the Trust and its assets until death.

What is Probate?

Probate is the legal process through which the court sees that, when you die, your debts are paid and your assets are distributed according to your Will. If you don’t have a valid will, your assets are distributed according to state law. Yikes!

Why is Probate “Bad”?

  • It can be expensive. Legal fees, executor fees and other costs must be paid before your assets can be fully distributed to your heirs. If you own property in other states, your family could face multiple probates, each one according to the laws in that state. These costs can vary widely; it would be a good idea to find out what they are now. 
  • It takes time, usually nine months to two years, but often longer. During part of this time, assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval. If your family needs money to live on, they must request a living allowance, which may be denied. 
  • Your family has no privacy. Probate is a public process, so any “interested party” can see what you owned, whom you owed, who will receive your assets and when they will receive them. The process “invites” disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors. 
  • Your family has no control. The probate process determines how much it will cost, how long it will take, and what information is made public.

As such, by taking proactive steps in creating a Revocable Living Trust, you can save your loved ones from years of headache and pain. So even though formalizing a strong and robust Estate Plan can always be put off until tomorrow, this is one area where being proactive can not only benefit yourself, but also your loved-ones for years to come. After all, nobody knows what tomorrow will bring.

But you’re not done yet. Once you have your Trust documents completed, there’s some key steps you need to take. Check out Part 4 for more on what you need to do to get the most out of your Revocable Living Trust.

Need More Help?

At Investing Forever Advisory, we have Will and Trust Packages, as part of our Estate Planning Service. You don’t have to make these important decisions on your own. Each estate planning session starts with a series of questions specifically designed by our attorneys. Your answers to these questions give the attorney the information they need to make a document recommendation to craft an estate plan that aligns with your wishes and intentions.

If you’re ever in need of guidance, these blog posts may be of help. But be sure to contact a financial, tax, or legal professional for guidance and information specific to your individual situation. And as always you can reach out to me directly here with questions or concerns about your personal situation.

Finally, if you want to see how your risk appetite stacks up, check out my free risk assessment here.

The End.

* Blog content used with permission from