Wealth Transfer


By March 5, 2021March 26th, 2021No Comments

Among the common items in the estate planning toolbox that you may have heard of is the revocable trust or living trust. Both terms are referring to the same thing, a revocable living trust.

Now, what is a revocable trust, and what does it do?

A revocable living trust exists during your lifetime in order to manage your assets and to then distribute those remaining assets after your death in accordance with the trust terms.  Unlike a will, however, the trust document itself remains private and is not filed with a probate court upon death. The trust is deemed “revocable” since you may modify or terminate the trust during your lifetime, so long as you are not incapacitated. 

The individual who creates a trust, known as the “Grantor” or “Settlor,” executes a trust agreement and transfers assets, such as bank accounts, real estate and other investments to the trust in order to “fund” the trust. (Certain assets should not be transferred to a trust because income tax problems may result. You should consult with your attorney, tax advisor and investment advisor to determine if your assets are appropriate for trust ownership.)

The “Trustee,” as the person responsible for the management of the trust, accepts the transfer of those assets and then invests and manages the trust property. The trustee is a fiduciary and must follow a strict standard of care when performing trust functions, such as paying all claims and taxes, and then distributing the assets to your beneficiaries upon your death. You can serve as the initial trustee, or you may appoint another person, bank or trust company to serve as trustee. Further, in the unfortunate event of your incapacitation, the trustee is typically expressly authorized to continue to manage the assets of the trust, pay bills, and make investments.  This can generally avoid the necessity of a court-appointed guardian of your property, which is another advantage of the revocable trust.

One of the more common reasons people form revocable trusts is to avoid probate, which is the court-supervised administration of an estate in which assets are transferred from the estate to beneficiaries in accordance with state law. Typical assets subject to probate are assets owned and titled in your individual name. This does not include assets owned jointly with a spouse or with rights of survivorship with a spouse or other person.  Those assets will typically pass to the surviving owner without the need for probate. 

The reason a revocable trust avoids probate is because the trust effectuates the transfer of the assets during your lifetime to the trustee.  The trust document lays out precisely who gets what, when, and how – you can essentially direct the disposition of your assets from beyond the grave.  Accordingly, the probate courts are not necessary to appoint a trustee or effectuate the transfer of your assets as the trustee already has immediate authority to manage the trust assets at your death. This is another one of the advantages of a revocable trust since avoiding probate may lower the cost of administering your estate in addition to can any time delay associated with probate proceedings.

While the advantages may be clear, it is also important to understand what a revocable trust does not do. A revocable living trust does not shield you from creditors, minimize gift taxes, avoid income tax, or avoid estate taxes altogether.  Due to the nature of a revocable trust, (i.e., the Grantor can control the assets and how the assets are used), creditors can still seize assets in a revocable trust as if the assets were never transferred to the trust to begin with. Accordingly, if creditor protection is the goal, then a revocable trust is not the likely solution.

Simply put, if you are considering enhancing your current estate plan, or simply refreshing your existing plan, it may be worth consulting with your tax and legal advisors to determine if a revocable trust is right for you.