Articles - Virginia Trusts Lawyer


What is an Inter Vivos Revocable Trust?

A revocable trust is a trust in which the creator of the trust (sometimes referred to as the “grantor”) reserves the right to amend or revoke the trust and recover the trust property.  An inter vivos revocable trust is a revocable trust which is created and takes effect during the grantor’s lifetime. 

Upon creation of an inter vivos revocable trust, the grantor should transfer assets to one or more trustees for safekeeping and management in accordance with the grantor’s instructions set forth in the trust.  Oftentimes the grantor designates himself or herself as the initial trustee and retains the right to use trust assets as if such assets were still owned by the grantor in his or her individual capacity. 

In addition to the initial transfer to the trust, the grantor can choose to further fund the trust during his or her lifetime by transferring both personal and real property to the trust.  The grantor can also choose to further fund the trust following death by making provision in his or her Last Will and Testament (the “Will”) to effectuate certain transfers (sometimes referred to as a “pour-over Will”).  Furthermore, a grantor may combine these two methods in order to best achieve his or her estate planning goals. 

It should be noted that although this type of trust is revocable by the grantor during his or her lifetime, the trust will become irrevocable immediately upon the grantor’s death (the terms of the trust may also provide that the trust will become irrevocable upon the incapacity of the grantor).

Incapacity Considerations

An inter vivos revocable trust ensures an individual’s assets will be managed in accordance with his or her wishes in the event that he or she becomes mentally incapacitated.  An inter vivos revocable trust avoids the time and expense associated with a court proceeding whereby a conservator is appointed to handle the assets of an incapacitated individual (including the time and expenses associated with public accountings of the conservator’s transactions which are required to be filed).  In an inter vivos revocable trust, the grantor can set forth who will handle the trust assets, how the trust assets will be managed, and whom will be the beneficiaries of such assets in the event the grantor becomes mentally incapacitated.  Should the grantor become mentally incapacitated while acting as trustee, the assets in the trust will thereafter be managed by a successor trustee, in accordance with the wishes of the grantor as set forth in the trust.

Probate Considerations

Property held in an inter vivos revocable trust does not need to be re-titled following the death of the grantor.  The trust assets are titled in the name of the trust during the grantor’s lifetime, and continue to be titled in the name of the trust following the death of the grantor (and until distributed from such trust to one or more beneficiaries).  As such, assets held in an inter vivos revocable trust will not be subject to probate upon the death of the grantor.  In addition, the delays associated with the transfer of property upon death and the expenses associated with probate (such as probate taxes and the filing of an inventory and account(s) for the decedent’s estate) can be avoided.

Privacy Considerations

When admitted to probate, a Will becomes a public document and its contents, including the identity of the beneficiaries, are available for public inspection.  The value and composition of the probate estate is also available for public viewing.  However, an inter vivos revocable trust is not treated in the same manner.  The terms of an inter vivos revocable trust, including the contents of the trust, the identity of its beneficiaries, and the value and composition of its assets, remain private (absent litigation or the terms of the trust requiring or permitting identification).

Tax Considerations

There are generally no federal tax savings when assets are transferred to an inter vivos revocable trust.  The grantor continues to maintain control over the assets titled in the name of the trust because the grantor generally has the ability to amend or revoke the trust at anytime during his or her life.  The trust assets are considered the assets of the grantor for income tax purposes.  Therefore, the grantor is required to report the income earned by the assets held in the trust on his or her own personal individual income tax return.  During the life of the grantor, income on the trust assets is reported under the grantor’s social security number.  Following the death of the grantor, the successor trustee will obtain a new taxpayer identification number for the trust, and the trust will be required to file its own federal and state income tax returns. 

The assets in an inter vivos revocable trust are considered to be part of the grantor’s gross estate for federal estate tax purposes when the grantor dies.  For purposes of determining the gross estate of the grantor, federal estate tax laws make no distinction between assets held in the grantor’s individual name (and subsequently distributed through the grantor’s Will), or in an inter vivos revocable trust (and following the death of the grantor either distributed outright, or maintained in trust, in accordance with the terms of such trust).

Opting for an Inter Vivos Revocable Trust

An inter vivos revocable trust is sometimes referred to as a Will substitute, which gives the false impression that the Will and inter vivos revocable trust are mutually exclusive estate planning devices.  Although a well-drafted inter vivos revocable trust can achieve many of the estate planning goals available through the use of a Will, there are many considerations to take into account before deciding which course, or combination of courses, to pursue.  In order to determine whether an inter vivos revocable trust is appropriate for one’s estate plan, an individual should consider present and future estate planning goals, the consequences of employing a Will alone, and long-term and short-term health issues, and then weigh the overall costs and benefits of employing an inter vivos revocable trust.