You may have seen or heard the term “Living Trust” or “Revocable Trust” before. These terms (“Living Trust” and “Revocable Trust”) mean the same thing. I prefer to use the term “Revocable Trust” to signify the fact that I am referencing a trust that is capable of being revoked or amended by its creator. A Revocable Trust is a testamentary device (such as a Last Will and Testament) that offers certain benefits that are not available when simply using a Last Will and Testament. The following provides some thoughts as to why someone may wish to incorporate a Revocable Trust into their estate plan.
What is a Trust?
Fundamentally, a trust has three elements. First, the trust must be created by someone. This person is typically referred to as the “Settlor” or “Grantor”. Second, the trust must have some form of property. In trust terminology, this property is referred to as the “corpus”. Third, there must be a Trustee. The “Trustee” is a person or entity that agrees to hold and administer the property in accordance with the terms of the trust.
What these legal elements boil down to is that a trust is created when someone holds property for the benefit of another person. In estate planning, a Revocable Trust is written to formalize, and provide details regarding, that trust relationship.
Why use a Revocable Trust?
There are a number of benefits to using Revocable Trusts. Three of the most significant benefits include: (i) the reduction (and possibly avoidance) of probate administration which generally speeds up administration and lowers expenses; (ii) managing potential incapacity; and, (iii) privacy.
1. Avoidance of Probate. The first of the three benefits described above is the avoidance of probate administration. There are good reasons to avoid probate administration, including: (i) bureaucracy of the system; (ii) delays; and, (iii) additional legal and accounting fees. Each of these are a burden on your beneficiaries and those that you leave to administer your assets after death.
Assets in a Revocable Trust at the time of death are not subject to probate administration (a process under which courts become involved in the administration of your assets). Depending on the nature of assets to be administered, proper use of a Revocable Trust can significantly reduce legal and accounting fees following death. It is true that incorporating a Revocable Trust into your estate plan will require more effort and expense during your lifetime, but that extra effort and expense tends to be less than the effort and expense required following death if a Revocable Trust is not used.
2. Planning for Incapacity. Occasionally, people that are getting older put one or more children on a bank account with them so that their children can pay their (the parents’) bills with the parents’ money in case the parents’ become incapacitated. This is a sloppy way of accomplishing what is intended and can create a number of problems. These potential problems include: (i) unexpected gift taxes; (ii) creditor/divorce/judgment issues where the accounts can be made subject to the creditors of the child that was added to the account for convenience, and, (iii) unintended ownership of the account following death. A better way to address incapacity concerns, and avoid these problems, is to use a Revocable Trust.
If you wish, you can serve as the initial trustee of your Revocable Trust and name someone to serve as your successor in the event that you become incapacitated. This successor trustee will be able to pay your bills, manage your investments, buy and sell assets on your behalf, etc.. as may be needed during a period of incapacity. This arrangement, in contrast to simply adding a name to a bank account, alleviates problems that occur with frequency.
Another commonly used solution to the incapacity problem is the use of a Durable Power of Attorney. Conceptually, a Durable Power of Attorney is a viable solution, but occasionally people struggle with getting a third party to accept the authority granted under a Durable Power of Attorney (even though there is in fact legal authority). As a result, particularly for purposes of administering bank accounts, I prefer using a Revocable Trust over a Durable Power of Attorney, or in addition to a Durable Power of Attorney.
3. Privacy. A few years ago there were a number of articles describing the terms of James Gandolfini’s Last Will and Testament, analyzing what he left to his son from one marriage versus his daughter from another marriage. Similar information was shared about Heath Ledger and Anna Nicole Smith. We know the details of their estates because they did not use Revocable Trusts.
If you are sensitive to (i) the nature of your assets (e.g., people knowing how much money you have or what assets you own)) or (ii) people not knowing exactly who received your assets upon your death, then you should consider a using a Revocable Trust. In a probate estate, the Personal Representative (sometimes referred to as an “Executor”) is required to file an inventory of the decedent’s assets and the value of those assets. That inventory, along with the Last Will and Testament, is a public record. There are plenty of reasons why you would want to keep this information private.
When Should You Consider Incorporating a Revocable Trust Into Your Estate Plan?
You should consider incorporating a Revocable Trust into your estate plan, regardless of your age, if you feel strongly about any of the benefits described above. Aside from those circumstances, I like to take a practical approach in considering when a Revocable Trust should be incorporated into an estate plan.
Picture a prototypical family, Husband, Wife and two children. Husband and Wife own a home in joint name, have bank accounts in joint name, possibly life insurance and a retirement plan from work. Does this family need a Revocable Trust?
If Husband were to die in an accident, would there be any significant probate administration? The answer under these facts is, no. As a result of Husband’s death, the home and bank accounts would become the property of Wife without probate administration. If Husband was insured, you would look to the beneficiary designation to see what happens to the insurance proceeds. The same would apply to Husband’s retirement plan.
What if the facts were reversed and Wife died first? You would have the exact same result as above – there would be no probate administration.
With the above facts, there would only be probate administration upon the death of the second spouse and/or if both spouses died together. While it is possible for a couple to die together in a common accident, is the likelihood of a common accident worth building your estate plan around? The answer to that question is a personal decision which will likely be driven by specific facts and circumstances.
Not everyone needs a Revocable Trust. With that said, I tend to favor the use of Revocable Trusts for anyone with concerns of incapacity or privacy, as well as individuals that are 65 or over. Incorporating a Revocable Trust into an estate plan is particularly important if that person is a widow, single, or has significant assets in their individual name. Obviously, the rationale behind this preference is that the likelihood of incapacity and/or death is much higher in someone over the age of 65 than for someone in their 40’s absent extenuating circumstances.
Given the many benefits, when developing an estate plan, one should consider whether a Revocable Trust would be a valuable addition.