Revocable trusts are commonly used in estate planning to avoid probate. However, they offer a wealth of other benefits. They also have disadvantages that can result in unintended consequences. To avoid problems, it’s essential to consult an attorney to determine whether a trust is the best option for your circumstances and goals and set it up properly.
Basic Components of a Revocable Trust
A revocable trust is a trust created during the creator’s lifetime that can be revoked or amended at any time before the death of the creator, giving the creator total control over the trust. Upon the death of the creator, the trust becomes irrevocable.
As with any trust, a revocable trust has a settlor/grantor (the individual who created the trust) and beneficiaries (those who receive benefits from the trust). A trustee is responsible for managing and administering the trust assets (i.e., any property or assets transferred into the trust) for the benefit of beneficiaries.
Advantages of Using a Revocable Trust in Estate Planning
A key benefit of revocable trusts is that they can bypass the probate process. If done correctly and all assets are put into the trust, those assets will pass to the beneficiaries immediately upon death as opposed to having to wait for probate. This is less costly, faster, and more efficient. It also ensures privacy, as trusts are generally private documents, unlike wills.
Revocable trusts are also flexible. As circumstances change, the settlor can modify or revoke the trust as needed without all of the formalities of modifying a will.
There are also advantages to revocable trusts during the settlor’s lifetime. If the settlor becomes incapacitated, the trust can ensure continuity in asset management and possibly avoid guardianship or conservatorship proceedings.
Key Considerations in Establishing a Revocable Trust
Before establishing a trust, there are important issues to discuss with an attorney.
- Funding the trust. To reap the benefits of a revocable trust, assets must be transferred into the trust’s name. Often, settlors fail to take this step and leave out property, which means those assets will have to be probated.
- Naming successor trustees. Trustees control the assets in the trust. Typically, the settlor is the trustee. However, successor trustees (individuals or institutions) must be named to manage the trust in the event of the incapacity or death of the settlor. Selecting the right trustee is essential since the job comes with fiduciary responsibilities.
- Tax implications. Revocable trusts are not a tool to avoid estate taxes since the trust assets remain part of the decedent’s estate. Further, they are not a gift to beneficiaries because the gift is not complete since the trust is revocable. However, there may be income tax issues to consider.
- Costs and fees: In some instances, it may not be worth establishing a trust because of the costs of establishing, maintaining, and administering it.
Comparison with Other Estate Planning Tools
There are advantages and disadvantages to revocable trusts compared to other tools commonly used in estate planning.
- Irrevocable vs revocable trusts. As noted, revocable trusts can be revoked or amended prior to death of the settlor, unlike an irrevocable trust. Because the assets in a revocable trust are in the control of the settlor, they are subject to creditor claims and remain subject to estate taxes. A revocable trust cannot be used for asset protection or Medicaid planning, unlike an irrevocable trust.
- Wills vs. revocable trusts. Wills require probate, which depending upon where you live at the time of your passing, can be costly and time-consuming. Trusts are also private while probate files are public.
- Testamentary trusts vs revocable trusts. Trusts created by a will, (i.e., “testamentary trusts”) are subject to ongoing probate court jurisdiction, which adds time and cost to their administration. A revocable trust becomes irrevocable at death so it is not subject to probate court supervision.
- Beneficiary designations. Life insurance policies and retirement accounts automatically pass to the designated beneficiary just as a trust would so there is no probate, but they only work with certain assets, unlike trusts.
Potential Limitations and Drawbacks
Revocable trusts are not designed to provide asset protection from creditors, which is the tradeoff for the grantor retaining so much control over the trust assets. Trusts can also be complex and costly to set up and administer. Depending on your needs and goals, there may be other options that can serve the same purpose that avoid these issues.
Estate Planning Scenarios Where Revocable Trusts are Particularly Beneficial
A revocable trust tends to be most helpful in certain situations, including:
- Blended families. A trust can help ensure that assets are distributed fairly between children from multiple marriages as well as providing for the current spouse.
- Privacy concerns. Some families may want to maintain the confidentiality of assets and beneficiaries.
- Out-of-state property. Putting such property in trust avoids the burden of managing assets located in different states and undergoing multiple probate processes.
- Special needs beneficiaries. A supplemental needs trust can provide money for beneficiaries while preserving eligibility for government benefits.
Conclusion
A trust can be a valuable part of a comprehensive estate plan. If you are considering a trust, contact us for a consultation to discuss the best strategies for your circumstances.
