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What are Revocable Trusts?
What is a Revocable Trust, and Who is Involved?
Revocable trusts are an effective way to avoid probate and provide for asset management in the event of incapacity. In addition, revocable trusts, sometimes called “living” trusts, are incredibly flexible and can achieve many other goals, including tax, long-term care, and asset-protection planning. A trust is a legal arrangement through which one person holds legal title to property for another person. As the creator of a revocable trust, you are called the “grantor” or the “donor.” While you are alive, you are a beneficiary of the trust and can also serve as either the sole trustee or as one of a number of co-trustees. The trustees manage the assets in the trust, which can include real estate, bank accounts, investments, and tangible property (such as fine art) under the terms set forth in the trust document.
Perhaps the best to think about a trust is to picture a bucket or pail. All of your assets fill up the bucket. At the time of your death, they pour out to your designated beneficiaries.
Whatever you place into your revocable trust (or bucket) during your life will pass to your beneficiaries at your death without going through probate, avoiding the cost, delay and publicity of probate. In addition, in the event of incapacity, a co-trustee can step in and manage the trust property without any fuss. While you can also accomplish this through a durable power of attorney, banks and other financial institutions are much more comfortable with trusts. They have been known to reject durable powers of attorney that are more than a few years old or to require that the drafting attorney certify that the power of attorney has not been revoked.
Most clients will say they want the best and most efficient way to easily distribute their estate when they are gone. We believe a revocable trust is the best option for estate planning.
What Are The Benefits of a Revocable Trust?
In our experience, a trust is better than simple beneficiary designations because a trust is more complex and accounts for many of life’s unanticipated situations. For example, a revocable trust will:
- Avoid probate if a child predeceases you;
- Amendable and flexible while you are still living;
- Protect assets from creditors;
- Keep assets and records private and away from the public eye;
- Ensure assets are distributed to grandchildren and not a son-in-law or daughter-in-law;
- Provide contingency planning if a beneficiary predeceases you;
- Avoid the necessity of changing beneficiary forms after life changes;
- Name a trusted individual to carry out your wishes;
- Prevent lump sum, immediate distributions to minors;
- Protect assets in the event of special needs planning;
- Minimize taxes to your spouse and children; and
- Provide a no-contest clause in the event of a family argument.
Overall, our clients value the benefits and options of a revocable trust. Because the future is unknown, a revocable trust puts families in the best position to avoid unforeseen risks.
TIP: A revocable trust is not the same thing as a testamentary trust. A testamentary trust is created when your assets are probated by your Last Will and a trust is set up by the courts. This form of estate planning can be disastrous, costing your family tens of thousands of dollars in unnecessary probate costs. The estate attorney, however, often is the biggest winner in these probates. Our firm will gladly offer a no cost consultation for any testamentary trust previously drafted by another attorney.
So What’s the Secret?
The secret to making revocable trusts work is to fund them (ie. filling up the bucket). This means retitling assets, whether real estate, bank accounts, or investment accounts, in the name of the trust. All too often, attorneys draw up estate-planning documents, advise clients to fund their trusts, and then nothing happens. Trusts have no relation to assets that are not retitled. However, if you execute a “pour-over” will along with your trust, saying that at your death all of your assets will be distributed to your trust, your wishes as to the ultimate distribution of your estate will be carried out. You just won’t avoid probate and will not have as strong protection in case of incapacity.
How Do I Fund My Revocable Trust?
BANK ACCOUNTS: To place bank and investment accounts into your revocable trust, you have a couple options: (1) You can simply name your trust as the Payable on Death designation or (2) You can retitle the account as follows: “[your name and co-trustee’s name] as Trustees of [trust name] Revocable Trust created by agreement dated 2022.” Depending on the institution, you might be able to change the name on an existing account. In some limited situations, you will need to open a new account in the name of the trust and then transfer the funds. The financial institution will probably require a copy of the trust, or at least of the first page and the signature page, as well as signatures of all the trustees. As long as you are serving as your own trustee or co-trustee, you can use your Social Security number for the trust. If you are not a trustee, the trust will have to obtain a separate tax identification number and file a separate 1041 tax return each year. You will still be taxed on all of the income and the trust will pay no separate tax.
REAL ESTATE: Our firm will execute a deed and a trustee’s certificate to transfer real estate into the trust. If you intend to refinance your property or take out a line of credit, do so before deeding the real estate into your trust. In most instances, banks and other lenders require that you remove the property from the trust and put it back in your name before signing any new mortgage papers. Depending on your state, you might also need to redo a homestead declaration after transferring property into a revocable trust.
TIP: During the process of transferring real property, often we find issues with a previous transfer. Incorrect legal descriptions, names, and missing signatures can create title nightmares for future generations. Failing to catch these mistakes before a loved one passes can lead to expensive real estate litigation and prevent the estate from selling property quickly.
What Do I Need to Do?
The following are some of the issues revocable trust documents cover, as well as decisions you might need to make:
- When does the successor trustee take over? When all of the original co-trustees stop serving—whether due to incapacity, death, or resignation—or when one of them stops serving?
- How do you define the incapacity of a trustee?
- What can the trust invest in?
- May it pay the debts of your estate?
- If there’s an absence of trustees for any reason and you are not available, who appoints the new trustee? Do you want to require that new trustees have any particular qualifications?
- Do you want to give anyone else the right to remove trustees?
- What accounts or statements, if any, must the trustee provide to beneficiaries?
- Do you want distributions to be made to beneficiaries under age 18, or just made on their behalf? Would you prefer the trustee to continue managing the funds until your children or other beneficiaries reach, say 25 or 30? You can also provide for partial distributions at various ages.
- What powers should the trustees have?
These and more issues need to be decided for all trusts. More complex trusts designed for tax and asset protection purposes present even more choices and get even longer and more complex.
At McClelland Law Firm, we believe that limiting our practice areas provides the greatest value to our clients. To us, value means providing exceptional service and efficient processes for each of our practice areas.
We are committed to compassionate representations, especially as it relates to elder law. No one should feel pressured, controlled, or “talked down” to in any meeting. Every client deserves to be heard and understood.