Insight on Estate Planning

The AP&S Trusts & Estates Blog

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Revocable Trusts Offer Benefits, But Beware of Their Drawbacks

There’s a good chance that your estate plan includes a revocable trust — sometimes known as a “living trust.” This type of trust can help your estate avoid probate, guard your privacy and provide protection in the event you’re incapacitated. But that’s not to say revocable trusts are without drawbacks.

What is a revocable trust?

A revocable trust’s basic premise is relatively simple. As the grantor, you establish a trust, transfer assets to it (essentially funding it) and name a trustee to handle administrative matters. You can name yourself as trustee or choose a professional to handle the job. Regardless of who you choose, be sure to name a successor trustee who can take over the reins when required.

If you designate yourself as the trust’s initial beneficiary, you’re entitled to receive income from the trust for your lifetime. You should also designate secondary beneficiaries, such as your spouse and children, who are entitled to receive the remaining assets after the trust terminates.

Notably, you still retain some measure of control over the trust during your lifetime. For instance, you may be able to revise certain terms, change beneficiaries or terminate the trust entirely. Thus, the typical living trust is “revocable.” The trust becomes irrevocable upon your death.

What are the pros?

For many people, the main reason for using a revocable trust — and sometimes the only one that really matters — is that the trust’s assets avoid probate. Probate is the process of settling an estate and passing the legal title of ownership of assets to heirs specified in a will. Depending on applicable state law, probate can be costly and time consuming. The process is also open to the public, which can be a major detriment if you treasure your privacy.

However, assets passing through a revocable trust aren’t subject to probate. Therefore, you don’t have the same concerns with respect to that property. This gives you control over deciding “who gets what” in the family without all the trappings of a will. And, along with the flexibility, it keeps your personal arrangements away from prying eyes.

Furthermore, a revocable trust can sidestep restrictive rules relating to guardianships and conservatorships, an often-overlooked benefit. If the trust is properly structured, beneficiaries will have access to assets without interference from a judge in the event you’re incapacitated. Otherwise, a guardianship or conservatorship can drag on longer than the usual probate process.

In addition, a revocable trust may be useful in separating assets for residents of a community property state. It can protect assets acquired before a marriage.

What are the cons?

A revocable trust can cost you time and money. Assuming you’re not proficient enough to handle the details on your own, you’ll have to pay a professional to establish the trust. Plus, you’ll incur additional fees if, for instance, you have a professional trustee. In fact, a revocable trust may cost more than a will initially, though as long as it works the way it’s intended it’s generally less expensive in the end.

It can, however, take some work to get the trust up and running. For instance, you may have to contact various financial institutions, insurance companies and transfer agents to facilitate ownership changes in accounts. You may also have to update beneficiaries, issue new stock certificates, revise business interests, sign and record real estate deeds, and retitle cars and other property.

Unfortunately, revocable trusts don’t offer much protection from creditors. Because you retain ownership rights in the trust property, the assets are exposed to creditor claims, unlike an irrevocable trust. (See “What’s the difference between revocable and irrevocable trusts?” below).

Finally, despite a common misconception, revocable living trusts don’t provide any direct tax benefits. The assets are included in your taxable estate and dispositions of trust property can result in tax liability. You must report the income tax that’s due, including capital gains on sales of assets, on your personal tax return.

Weighing the benefits

You can’t rely on a revocable trust to solve all your estate planning problems. Nor should it be viewed as a one-step alternative to having a will. Nevertheless, the pros discussed above may outweigh the cons — and often do — for your personal situation. Practical advice: Consult with your estate planning advisor to determine if a revocable trust is right for your plan.

SIDEBAR:   What’s the difference between revocable and irrevocable trusts?

There’s a basic distinction between revocable and irrevocable trusts. With a revocable trust, you retain the right to revise the trust’s terms, including removing or adding beneficiaries and restricting management of the trust assets. This provides you with flexibility even though the assets have been transferred to the trust.

An irrevocable trust has the opposite effect. The trust’s terms cannot be changed after the trust has been drafted. However, the assets you transfer to an irrevocable trust are protected from creditors and removed from your taxable estate. Thus, unlike revocable trusts, irrevocable trusts offer tax benefits.  Consider the differences and weigh your options.

About The Authors

A professional headshot of Kristin Matsko in front of windows.

Kristin N. Matsko

Kristin, Chair of the firm’s Trusts & Estates Group, counsels individuals and fiduciaries on a wide variety of trusts and estates… Read More

A professional headshot of David Riedel in front of windows.

David T. Riedel

An author and frequent lecturer on estate planning, administration and taxes, David provides responsive, sympathetic and personable counsel to his varied… Read More

A professional headshot of Kathryn Windsor in front of windows.

Kathryn S. Windsor

Kathryn is Chair of the firm’s Tax Group and represents clients in a variety of tax law matters. Her practice areas… Read More

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