August 24, 2011
Authored by: Alan Singer
In light of the increase in the estate tax exemption to $5,000,000, several clients of mine asked why they need a Revocable Trust if they don’t need advanced tax planning (at least in their minds). The following discusses some of the reasons for doing so.
What is a Revocable Trust?
A Revocable Trust (also known as a “living trust” or an “inter-vivos trust”), is a legal arrangement in which the creator (referred to as a “grantor” or “settlor”) transfers, during life, all (or part) of his or her assets to a Trustee to be managed and administered pursuant to the terms designated in the trust until fully distributed to the beneficiary or beneficiaries. The Grantor retains for life the right to all income from the trust, the right at any time to withdraw assets from or to add assets to the trust, and the right at any time to revoke or amend the trust; the Grantor maintains complete control over the trust until his or her death or incapacity. The Trustee may be the creator of the trust, one or more family members, a trusted friend or financial advisor (such as an accountant or attorney), or a professional fiduciary (such as a bank or trust company).
Why do you need a Revocable Trust?
There are a number of non-tax advantages of creating a Revocable Trust which include:
A Revocable Trust avoids Probate.
Any assets owned by the Trustee(s) of a Revocable Trust at the Grantor’s death will pass to his or her beneficiaries without being subject to probate administration. Use of a Revocable Trust therefore avoids the administrative expenses and fees of a court appointed personal representative, and the publicity, delay, and restrictions on the management of assets that would result if the Grantor’s assets were subject to probate administration. Without a Revocable Trust, in the event of the Grantor’s disability or death, a court appointed guardian or personal representative, as the case may be, would be required to report the details of his or her administration to the supervising court. A court-supervised guardian or even a personal representative under a Will has much less flexibility in terms of the investment and administration of assets than does the Trustee of a Revocable Trust. Nevertheless, of course, the Trustee of such a trust would be required to account to the beneficiaries regarding administration of the trust, and can be required to account to a court if it appears that the Trustee is not carrying out his or her duties under the trust.
A Revocable Trust preserves privacy.
At the Grantor’s death, his or her Will would have to be filed with the court, as a document of public record; thus, all of the details regarding the value and administration of property provided for under the Will would become matters of public knowledge. Since a Revocable Trust need not be filed with any court, and since the administration of the assets in such a Trust need not be reported to any supervising authority, use of a Revocable Trust would avoid any such publicity.
A Revocable Trust eliminates the need for a Conservatorship in the event of your incapacity.
A Revocable Trust would function as a vehicle for the management of the Grantor’s assets in the event that, for some reason, the Grantor became incapacitated and unable to handle his or her business affairs in the future. Title to the assets placed in a Revocable Trust is held by the Trustees; in the event the Grantor becomes disabled or incapacitated and could not manage his or her affairs, the successor Trustee(s) previously designated would automatically (and without the necessity of court intervention) take over management of the assets of the Revocable Trust. Accordingly, a Revocable Trust would be beneficial not only in situations where, because of sickness, absence or injury, the Grantor is no longer physically able to attend to business affairs, but also in the event the Grantor should become “incapacitated” or “incompetent” as defined under state law; in the latter case, without a Revocable Trust, either an attorney in fact acting under a previously granted durable power of attorney or a guardian appointed by the local probate court would be needed to manage the Grantor’s property.
A Revocable Trust controls the disposition of your assets during life and upon death.
Use of a Revocable Trust can provide for continuity of investment and management of the Grantor’s assets, both during life and even after his or her death. This may be important where either the Grantor or the designated beneficiaries are unwilling or unable to adequately manage such assets themselves. A Revocable Trust can be drafted so as to carry out the Grantor’s estate planning goals with respect to the disposition of his or her property following death, just as could be done under a Will. Any type of dispositive plan, whether determined with estate tax consequences in mind or not, can be provided for under a Revocable Trust in the same way it could be provided for under a Will.
Use of a “Pourover” Will.
The benefits described above are available only if the Grantor actually funds (i.e., transfers assets to) the Revocable Trust during his or her life. This will involve some time and effort on the Grantor’s part and some expense in reregistering securities and re titling other assets; any such costs should be minimal, but anyone considering creating such a trust needs to be aware of the possible inconvenience of the initial transfer of their assets to the Trust. Because it is possible, or even likely, that you may not transfer every single asset you own to your Revocable Trust during your lifetime, your Revocable Trust plan will also include a so-called “pourover” will, which will add your remaining assets to your Revocable Trust at death.
In summary, the use of Revocable Trusts in estate planning offers a number of benefits in terms of facilitating administration of assets (particularly in the event of the death or disability of the Grantor), continuity of competent investment and administrative services, and the avoidance of the publicity and expense involved in a guardianship or probate administration. In addition, during the life of the Grantor the existence of the Revocable Trust, even though fully funded with all of the Grantor’s assets, will not result in any meaningful restrictions on the Grantor’s power with respect to the Trust property. Despite a few minor potential income tax disadvantages resulting from the use of such trusts after the Grantor’s death and the practical problems associated with the transfer of assets to the Revocable Trust or its creation, on balance they appear to be an appropriate estate planning strategy for many clients.