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REVOCABLE TRUSTS
GENERALLY
Created by the Grantor during his or
her lifetime, a revocable trust is an instrument which sets
forth instructions concerning the management of the Grantor’s
assets, and which grants authority to one or more trustees to
carry out those instructions (most often the Grantor retains
this authority and is designated as the initial trustee).
Accordingly, the Grantor decides both when to fund the trust and
with what assets. The Grantor, in addition to the initial
transfer to the trust at its creation, can choose to further
fund the trust during his or her lifetime by transferring both
personal and real property to the trust, or a Grantor can choose
to further fund the trust following death by making provision in
his or her Last Will and Testament (often referred to as
a pour-over Last Will and Testament) to effectuate certain
transfers. Furthermore, a Grantor may even combine these two
methods in order to best achieve his or her asset management
goals. It should be noted that although this type of trust is
revocable by the Grantor during his or her lifetime, it becomes
irrevocable immediately upon the Grantor’s death.
A REVOCABLE TRUST VERSUS A LAST WILL
AND TESTAMENT A
revocable trust is sometimes referred to as a “Will Substitute”,
which gives the false impression that these two documents are
mutually exclusive asset management devices. Although a
well-drafted revocable trust can achieve many of the asset
management goals available through the use of a Last Will and
Testament, there are many considerations to take into account
before deciding which course, or combination of courses, to
pursue. ADVANTAGES OF A
REVOCABLE TRUST
Incapacity Considerations
A 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. It avoids the time and expense associated with a
court proceeding whereby a Conservator is appointed to handle
the assets of an incompetent individual, and which also results
in the requirement for the filing of public accountings of the
transactions of the Conservator. Through a revocable trust, the
Grantor can set forth who would handle the trust’s assets, how
the trust assets would be managed, and whom these assets would
benefit (both during the Grantor’s lifetime and following the
Grantor’s death) should the Grantor become mentally
incapacitated. The revocable trust may provide that so long as
the Grantor is acting as Trustee, he or she may use all the
assets in the revocable trust, and can even elect to revoke the
trust. Should the Grantor become incompetent while acting as
Trustee, the assets in the revocable trust will thereafter be
managed by a successor trustee, in accordance with the wishes of
the Grantor as set forth in the revocable trust.
Privacy Considerations
When admitted to probate, a Last
Will and Testament becomes a public document. Anyone can inspect
its contents, including the identity of the beneficiaries. The
size and composition of the probate estate is also open to
public viewing. A revocable trust is not treated in the same
manner. The terms of the revocable trust remain private – the
contents of the revocable trust, the identity of its
beneficiaries, and its value and composition of assets (absent
litigation, or the terms of the trust requiring or allowing
identification). Probate
Considerations
Following the Grantor’s death, assets held in a revocable trust
do not pass through the probate process. There are no probate
taxes associated with these assets.
Tax Considerations
There are generally no federal tax savings
when assets are placed in a revocable trust. Because the Grantor
has the ability to revoke the trust at anytime during his or her
life, the Grantor continues to maintain control over the assets
titled in the trust. Those assets are considered the assets of
the Grantor for income tax purposes; therefore, the Grantor must
continue to report the income earned by the assets held in the
trust on his or her own personal individual income tax return.
The assets in a revocable trust are
considered to be part of the Grantor’s gross estate for federal
estate tax purposes when the Grantor dies. There is no
distinction by the Internal Revenue Service whether the assets
are held (i) in the Grantor’s individual name (and subsequently
distributed through the Grantor’s Last Will and Testament), or
(ii) in a revocable trust (and either distributed outright, or
maintained in trust, in accordance with the terms of the
revocable trust), for purposes of calculating the gross estate
of the Grantor. One major
benefit of a revocable trust is that property held in the trust
does not need to be retitled following the death of the Grantor.
The trust’s assets are titled in the name of the trust during
the Grantor’s lifetime, and following the death of the Grantor
continue to be titled in the trust’s name. While the Grantor is
living, income on the trust assets is reported under the
Grantor’s social security number. Following the death of the
Grantor, the trust becomes irrevocable, and the successor
Trustee will need to 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.
OPTING FOR A REVOCABLE LIVING
TRUST A revocable trust
shares many characteristics with a traditional Last Will and
Testament, but also offers unique advantages unattainable
through the use of a Last Will and Testament alone. In order to
determine whether a revocable trust is an effective alternative
to manage one’s assets, an individual should examine present and
future financial goals, identify potential financial
contingencies, examine the effect of employing a testamentary
device alone, consider health issues (both long-term and
short-term), and then weigh the overall costs and benefits
provided under these various alternatives. |
