A Revocable Trust is an estate planning entity that you create during your lifetime. You can transfer assets to your Trust during your lifetime or through your will. Typically, you are both the sole trustee and the sole/main beneficiary of the Trust. This means that during your lifetime and while you have capacity, you are in full control of the Trust. For example, you can transfer all or some of your assets to the Trust, you can transfer assets out of the Trust, and you are entitled to all of the income generated by the Trust’s assets. Furthermore, you can change the trustee and beneficiaries at any time, and you can (as the name of this type of trust suggests) revoke the Trust at any time.
Advantages of Revocable Trusts
A Revocable Trust has various non-tax advantages, which may be significant even in the event tax planning is not desired or not necessary. One of those advantages is to provide for long-term management of your assets in accordance with your instructions. For example, if you are married, you can mandate that upon your passing your assets are to remain available for your spouse while he or she is alive, and that your assets would be distributed to your beneficiaries (for example, your children or grandchildren) only after the passing of your spouse, and only after your children have reached a certain age or met certain conditions.
If you so choose, you can also “limit” the circumstances under which your spouse is permitted to withdraw Trust income or assets. These limitations (or strings) may be desirable if one of your overarching goals is to preserve as much of the Trust assets as possible for your remainder beneficiaries, such as your (grand)children.
An additional benefit of having assets owned by a Revocable Trust is that your beneficiaries would be able to avoid probate court proceedings to the extent that your Trust owns assets by the time you die, which can be (1) time consuming (and thus resulting in delays until your beneficiaries can access the assets), (2) expensive due to legal as well as court fees, particularly if the probate proceeding takes longer than expected (for example, due to challenges by disgruntled beneficiaries/distributees or because there are other issues concerning the probate proceeding), and (3) public, since court documents are, generally, a matter of public record. Avoiding probate may be particularly important if you own real estate in another state. In order to avoid probate, most, if not all of your assets, will need to be owned by the Trust by the time you die.
However, only those assets actually held by the trust would be subject to the Trust’s terms and conditions. Furthermore, only those assets actually held by the Trust at the time of your death would not be subject to probate. What happens to those assets that, at the time of your death, are owned by you personally? To address that issue, we usually suggest having a “Pour-Over Will.” A Pour-Over Will is a Last Will and Testament that typically mandates that all of your assets that remained outside of the Revocable Trust are to be transferred to said Trust at your death as part of the “Residue” of your estate, for further disbursement in accordance with the Trust’s terms.
For the purpose of illustration, consider the following example for when a Pour-Over Will may become helpful: assume husband and wife purchase a house but forget (or didn’t want) to title it in the name of the Trust. Typically, in such a scenario, the couple would own the house as tenants by the entirety, which means the house would automatically pass -directly- to the surviving spouse, outside of both the Trust and Will. But, upon death of the surviving spouse, the pour-over provisions of the surviving spouse’s Will would (if so desired) mandate that the house gets transferred to the surviving spouse’s Trust (if any), for further disbursement in accordance with that Trust’s terms. That being said, the assets transferred by the Pour-Over Will (in this case, the house) would be subject to probate, because the house was owned by the surviving spouse. Therefore, if probate is to be avoided entirely, all of your assets would need to be transferred to the Trust during your lifetime.
Another key advantage of a lifetime or Inter-Vivos Trust is that a court’s jurisdiction over such Trust is limited, compared to a Testamentary Trust that was created through a Will. Specifically, in order to serve as trustee of a Testamentary Trust, the trustee needs to obtain “Letters of Trusteeship,” which in turn requires a court proceeding. Depending on the circumstances at that time, for example, when the initial trustee dies or resigns, obtaining new Letters of Trusteeship for the successor trustee may be burdensome, complex and/or costly as a result of a necessary separate court proceeding. Since Letters of Trusteeship are not required for a trustee named in a lifetime or Inter-Vivos Trust, that type of Trust may be preferable for that reason alone.
Additional benefits of a Revocable Trust are as follows: if drafted appropriately, the revocable trust can (i) enhance asset protection from future creditors of your beneficiaries (at least from certain creditors); (ii) possibly provide limited “divorce” protection for the beneficiaries, and (iii) avoid a guardianship court proceeding in the event of your incapacity. This may be of particular importance if you want to ensure that your assets are managed properly during your incapacity by a person of your choice, without having to resort to costly court intervention. While a durable power of attorney may also address the management of some of your assets during your incapacity, a Trust that already holds your assets is superior to a power of attorney, in part because the Trust allows you to plan and account for various situations and contingencies.
Tax Aspects of Revocable Trusts
When you create a Revocable Trust, you typically retain full control over the trust and its assets. For that reason, during your lifetime you will continue to be deemed the owner of your Trust’s assets for income tax purposes. Also for that reason the assets held in your Revocable Trust would be part of your gross estate for estate tax purposes. This in turn means the assets held in your Revocable Trust at the time of your death would receive a “step-up in basis” and be valued at the fair market value as of the time of your death. Depending on the overall value of your gross estate (and depending on the applicable estate tax exemptions available at the time of your death), this may or may not be a desirable result. In order to remove assets from your gross estate, you would have to undertake additional estate planning, in which transfers of your assets to an Irrevocable Trust may be a key component
