An Introduction to Revocable Trusts

An Introduction to Revocable Trusts (aka Living Trusts)—to learn more, find an Estate Planning Lawyer at www.ZeekBeek.com

A revocable trust is – a revocable trust!  No, that is not meant to be a joke.  A revocable trust is simply a trust that is revocable by the person who created it at any time up until that person’s death.  A trust is an arrangement where a person (usually called the “settlor” or “grantor” or “creator”) transfers property to a trustee to be held for the benefit of someone (called the “beneficiary” or, if more than one, “beneficiaries”).  With a revocable trust usually the settlor is also the sole trustee and the sole beneficiary of the trust during his or her lifetime.   Revocable means just what it says—the settlor can change his or her mind at any time up until his or her death, revoke it, and all the trust property will be returned to the settlor and the trust will cease to exist.  The terms of the revocable trust are set forth in a written trust document that must be signed by the settlor (and the trustee, if the trustee is a different person), and should also be notarized. 

Does a revocable trust have any income, gift or estate tax benefits?  No. In fact, for all tax purposes, it’s treated exactly as if the settlor still owned the property.  So why would anyone create a revocable trust?  Because a revocable trust has lots of advantages as both a will substitute and a way of planning for incapacity. 

To Fund or Not to Fund During Life? If you do not fund (i.e., transfer assets to) the revocable trust during your lifetime you will lose most of the benefits. Although there is some cost to transferring assets, in most cases it is modest and is outweighed by the benefits of funding.  It should be noted that some assets may not be eligible to be held by a revocable trust because there are restrictions on transfer – in particular, some cooperative apartments do not permit revocable trust ownership.

Planning for Incapacity.  It is a sad fact that many people will be incapacitated for a period of time before they die, and in some cases (for example, if an individual has Alzheimer’s) that period may be quite lengthy.  Revocable trusts have a lot of benefits in the event of incapacity:

1.     The Revocable Trust can name a successor trustee (or trustees) to take over immediately if the settlor becomes incapacitated (or if for any other reason at any time the settlor does not wish to act as Trustee).  That allows seamless management of the trust property and care of the settlor’s financial needs.

Note—it is advisable to include a definition of incapacity in the trust document.

2.     The successor trustee of a revocable trust should not have difficulty in dealing with the settlor’s financial assets or with banks, brokerage houses, etc., because the assets are already held by the revocable trust – and the substitution of a new trustee does not affect that.  By contrast, it can be complicated and time consuming to organize a person’s financial assets using a durable power of attorney.

3.     Estate planning features, like continuing annual giving or providing for the settlor’s spouse, can be built into the Revocable Trust.            

Will Substitute.  After death a revocable trust can function the same way as a Will.  That is, all the provisions about what will happen to your property after your death can be written into the trust.  You will usually need a small Will (called a “pour-over” will) to specify that any assets that were not transferred to the revocable trust during your lifetime will be paid over to the revocable trust upon your death.   A revocable trust has several advantages as a Will substitute. 

1.     One advantage is privacy – the contents of a Will are public, but the contents of a revocable trust are private.  Some people do not wish others to be able to find out how they are disposing of their property.

2.      In addition, provided that the revocable trust is funded during lifetime, a revocable trust means that the nature and extent of your assets will also not be publicly known upon your death.

3.     A funded revocable trust also provides excellent continuity in managing your assets after death.  Rather than having a period of suspension during which an Executor must be appointed to deal with your assets, the successor trustee of a revocable trust can immediately step in and begin to function upon your death.  That is helpful for taking care of your family and can be critical in cases where, for example, your assets are in need of ongoing active management.

4.     A funded revocable trust makes it much easier for your family because all of your financial assets are already identified and gathered in the trust before death.

5.     A funded revocable trust also simplifies the probate process by avoiding ancillary (“extra”) probate for any out of state residences, avoiding or minimizing required court filings and delivery of various notices, and reducing fees.

6.     If you anticipate any objection to the way you are disposing of your estate a revocable trust is also harder to attack than a Will.        

Disclaimer – Blog Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.