Should a Revocable Trust Be Part of Your Estate Planning?

Revocable trusts have garnered significant attention in recent years due to their perceived benefits in estate planning, which has led to numerous misconceptions about their use. Although revocable trusts have certain advantages, they are not appropriate in all circumstances. 

What Is a Revocable Trust? 

A revocable trust, sometimes referred to as a living trust or grantor trust, is a separate entity established by an individual, known as the grantor, to manage assets during their lifetime and distribute them after death. The grantor is also generally the trustee of the trust during their lifetime. As trustee, the grantor will typically continue to control and manage the trust assets in the same manner as before the trust was formed.  

The trust document outlines all the powers and authorities granted to the trustee, including the power to reclaim assets or terminate the trust. If the grantor wishes to make gifts from trust assets, the trust must authorize the trustee to gift assets to individuals and charities.  

Successor trustees are named in the trust document in the event the grantor becomes ill, incapacitated, or dies. The grantor also generally retains the right to withdraw the income or principal of the trust, to remove trust assets, or to terminate the trust during their lifetime. Thus, the grantor maintains complete control of the assets during their life. 

Taxable income earned on trust assets during the donor’s lifetime is generally reported on the donor’s individual income tax return just as if the trust did not exist. A separate trust tax return and a separate tax identification number are not required. However, there may be special circumstances when the trustees are required to file a separate return. 

For assets to be governed by the trust, they must be retitled in the trust’s name. This involves retitling bank and brokerage accounts, reissuing stock certificates, re-deeding real estate, and changing beneficiary designations. The trust terms do not control assets not titled in the trust name. 

Advantages of Including a Revocable Trust in Your Estate Plan 

Revocable trusts that are adequately funded offer several advantages, including flexibility, privacy, avoiding probate and multistate probate proceedings, planning for incapacity or incompetency, and reducing the risk of the will being contested. While these advantages should be considered, they may not be suitable for all estate plans, and alternative approaches may be available to achieve the same goals. 

Potential Drawbacks and Limitations to Consider 

There are several disadvantages as well. In general, revocable trusts do not avoid estate taxes. Since the grantor retains control and use of the assets, the assets’ value is still includible in the estate for federal and state estate tax purposes. Secondly, there are additional costs and complexity in setting up the trust, and the trust does not replace the need for a will. Finally, since the grantor retains control of the assets, there is no liability protection. 

Why Avoiding Probate Could Be Desirable 

There are several disadvantages of settling an estate through the probate process, including: 

• Probate can be costly 
• The estate must be open for a minimum of six months, and it may take longer to distribute assets 
• All documents and reports in the probate process are a matter of public record 
• If assets are held in multiple states, probate must be completed in each state 

A revocable trust is not the only method for avoiding probate. Assets titled jointly with right of survivorship or as tenants by the entireties will avoid probate. Assets where a beneficiary can be designated, such as life insurance, retirement accounts, and annuities, also avoid probate. Other forms of ownership, such as life estates and pay-on-death accounts, may also avoid probate. 

Who Should Consider a Revocable Trust? 

Each estate plan should be tailored to an individual’s wishes and the assets they hold. Before making any decision, consult with an estate planning professional to determine the best estate plan for you. If you have any questions or need assistance, please contact us using the form below.