Revocable Trusts

REVOCABLE TRUST: An Overview

Why Should I consider a Revocable Living Trust as a planning tool?

A Revocable Living Trust is a legal document that allows you to make instructions about the management and control of your property while you are alive and the distribution of your estate after your death. This is the important benefit of a Living Trust over a Durable Power of Attorney which terminates at death. You will serve as the initial trustee; if you want, family members, friends, trusted advisors, banks or trust companies can also be named as trustees, either now or after you decide you do not want the job anymore or after your death or disability. You will be the primary beneficiary of the trust while living. Once your Revocable Living Trust is created, title to your assets should be transferred to it. You will transfer your bank accounts, certificates of deposit, real estate, investments, etc. into your Revocable Living Trust. When this process is complete, you, as an individual will no longer technically own the transferred property. Your Revocable Living Trust will be the legal owner, but you will retain complete control of your trust and the assets in it.

Can I change my Revocable Living Trust?

Your Revocable Living Trust can be modified whenever you wish; at any time (while you are alive and competent), you may alter, amend, or even revoke your Living Trust.

Why does a Revocable Living Trust avoid Death Probate while a will does not?

A will is a legal document which takes effect only upon your death. A will is designed for one purpose: to dispose of your assets upon your death. Probate and administration are the legal process of proving that your will is valid, paying your creditors, and transferring property to your heirs. A will must go through some type of probate proceeding even if the probate procedure is simplified because the estate is small.

A Revocable Living Trust allows you to “self-probate” your assets while you are alive and competent. The funding or retitling component of the Revocable Living Trust process allows you, as the trust maker, to transfer your assets into your Revocable Living Trust and consequently avoid the probate process.

What is “Death Probate”?

Death Probate is a legal proceeding ultimately controlled by the probate court. For the most part, Death Probate and the administration of an estate are comprised of six basic tasks:
1. Admitting the will to probate and determining its validity
2. Notifying the decedent’s heirs and beneficiaries
3. Inventorying and appraising the decedent’s assets
4. Paying creditors
5. Making sure any state inheritance tax has been paid
6. Distributing assets to the beneficiaries or heirs

The probate process often can be expensive and time-consuming. Studies indicate that the average cost of probate is anywhere between 3 and 10 percent of the value of the gross estate. The gross estate is the full appraised value of the estate without any reduction for debts and expenses. The average length of probate is between 1 and 2 years, although even the probate for a small, uncomplicated estate sometimes lasts several years. The probate process is also a matter of public record. Any person can access a decedent’s probate file and discover personal estate planning and financial information about the deceased person and his or her family. If you die owning assets in your own name, your will must be probated in order to convey legal title of your assets to beneficiaries named in your will. Consider your house: How are your heirs going to be able to do anything with the house? Your will must go through probate in order for the probate court to change the title on all your assets, including your house, into the names of your beneficiaries.

What types of property pass outside the probate process?

Examples include funds in 401(k) plans, individual retirement accounts, other types of pension plans, annuities, property held in joint tenancy, property held in certain trusts, and property held as tenants by the entirety.

Does a Revocable Living Trust avoid Federal Estate taxes?

Your Revocable Living Trust, if written correctly, will take maximum advantage of each person’s federal estate tax exemption. By structuring a Revocable Living Trust correctly, a married couple can pass up to a total of $1.350 million (in the calendar years 2000 and 2001) completely free of federal estate tax. A single person can pass $675,000 federal estate tax-free during this time period.

How Does a Revocable Trust Benefit My Estate Plan?

If you become disabled or are unable to manage your financial affairs, your Living Trust will eliminate the need for a court-appointed guardian to take control of your assets. Also, with a Living Trust your assets will go directly to your beneficiaries after your death. There will be no court interference. There will be a significant reduction in attorney’s fees and no court costs. In most situations, there will be no delay in distributing assets, and all your estate planning goals will be completely private.

A Living Trust creates no adverse lifetime income tax consequences. Because your Living Trust is revocable, the income generated by the assets in your trust is taxed to you as an individual and is reported on your personal income tax returns. This means that your personal income tax situation is exactly the same after the creation of your Living Trust as it was before. A Living Trust is difficult for disgruntled heirs to attack. A Living Trust is not part of the probate process and is also not governed by the complex rules surrounding a will, and this makes a Living Trust less prone to attack.

Can I sell assets owned by my Living Trust without complications?

You sell assets in the same way you currently do. You will, however, add the word trustee after your signature.

If I have stocks and bonds, how difficult is it to transfer these individual securities into my Revocable Living Trust?

The procedures for transferring your stocks and bonds into your Revocable Living Trust will vary for each security. There is a consistent system that you can use to facilitate all such transfers. Generally, when you have individual securities, you need to send the original certificates along with a letter of instruction to the transfer agent for that particular security or instruct your broker/account executive of your intentions to transfer the security to your Revocable Trust.

When transferring assets into my Revocable Living Trust, do you recommend that I change the ownership of my IRA to the name of my trust?

Qualified plans such as IRAs, 401(d)s, pensions, thrift plans, Keoghs, SEPs, and other plans where tax has been deferred should not have your Revocable Living Trust as owner. If you were to transfer the ownership of your IRA or other qualified plan into the name of your Living Trust, the transfer would be classified as a distribution and as such it would generate a taxable event in the year you made the transfer. You can change the primary beneficiary of the retirement plan to your spouse and make your secondary beneficiary your children.

Do I need a will if I have a Revocable Living Trust? For the most part, a Revocable Living Trust will enable your trustee to immediately direct assets to your beneficiaries upon your death. However, a Will must be prepared along with your Living Trust. The purpose of the Will is to allow your personal representative to “pour-over” to your Living Trust those assets which may not have been transferred to your trust during your lifetime.

This memorandum is intended to convey to you the principal consideration of a Revocable Trust as it applies to most estate planning. For that reason I have deliberately simplified technical aspects of the tax law in the interest of clear communication. Under no circumstances should you rely on the contents of this Memorandum for professional advice nor should you reach any decisions with respect to a Revocable Trust without further discussion and consultation with your legal counsel and tax advisors.