Revocable trusts are an effective way to avoid probate and provide for asset management should you ever lose capacity. In addition, revocable trusts – sometimes called “living” trusts – are incredibly flexible. They can achieve many other goals, including tax, long-term care, and asset-protection planning.
What Is a Trust and When Should My Estate Plan Include One?
A trust is a legal arrangement through which one person holds legal title to property for another person.
As the creator of a revocable trust, you are the “grantor” or the “donor.” While you are alive, you are a beneficiary of the trust.
You can also serve as either the sole trustee or as one of a number of co-trustees. The trustee manages the assets in the trust. These assets can include real estate, bank accounts, investments, and tangible property (such as fine art) under the terms set forth in the legal document. (Note that some exceptions include retirement accounts like 401(k) plans.)
Whatever you place into trust during your life will pass to your beneficiaries at your death without going through probate. This can help your loved ones avoid the cost, delay, and publicity of the probate process. (Access another article to learn more about probate.)
This type of trust can also prove useful should you ever become unable to manage your own medical care or financial affairs. A co-trustee can step in and manage the trust property without any fuss.
Note that you can also accomplish this through a durable power of attorney as well. However, banks and other financial institutions are much more comfortable with trusts. They may reject durable powers of attorney that are more than a few years old. Or they may require that the drafting attorney certify that the power of attorney has not been revoked.
Funding a Revocable Living Trust
The secret to making revocable trusts work is to fund them. This means retitling assets, whether real estate, bank accounts, or investment accounts, in the name of the trust. All too often, attorneys draw up estate planning documents, advise clients to fund their trusts, and then nothing happens. Trusts have no relation to assets that you have not retitled.
Note that executing a “pour-over” will along with your trust can remedy this. A pour-over will states that, at your death, all your assets go to your trust. This way, your wishes regarding the ultimate distribution of your estate will be carried out. However, you won’t avoid probate and will not have as strong a level of protection if you suffer a loss of capacity.
To place bank and investment accounts into your trust, you need to retitle them as follows: “[your name and co-trustee’s name] as Trustees of [trust name] Revocable Trust created by agreement dated [date].”
Depending on the institution, you might be able to change the name on an existing account. Otherwise, you will need to open a new account in the name of the trust and then transfer the funds. The financial institution will probably require a copy of the trust, or at least of the first page and the signature page, as well as the signatures of all the trustees.
If you are serving as your own trustee or co-trustee, you can use your Social Security number for the trust. If you are not a trustee, the trust will have to obtain a separate tax identification number and file a separate 1041 tax return each year. You will still be taxed on all the income, and the trust will pay no separate tax.
You will need to execute a deed and a trustee’s certificate to transfer real estate into the trust. If you intend to refinance your property or take out a line of credit, do so before deeding the real estate into your trust.
In most instances, banks and other lenders require that you remove the property from the trust and put it back in your name before signing any new mortgage papers. Depending on your state, you might also need to redo a homestead declaration after transferring property into a revocable trust.
What to Consider in Setting Up a Revocable Trust
The following are some of the issues revocable trust documents cover, as well as decisions you might need to make:
- When does the successor trustee take over? Does this happen when all the original co-trustees stop serving — whether because of loss of capacity, death, or resignation — or when one of them stops serving?
- How do you define the loss of capacity of a trustee?
- What can the revocable trust invest in?
- May the revocable trust pay the debts of your estate?
- If there’s an absence of trustees for any reason and you are not available, who appoints the new trustee? Do you want to require that new trustees meet any particular requirements?
- Do you want to give anyone else the right to remove trustees?
- What accounts or statements, if any, must the trustee provide to beneficiaries?
- Do you want distributions to be made to beneficiaries under the age of 18, or just made on their behalf? Would you prefer the trustee to continue managing the funds until your children or other beneficiaries reach, say, age 25 or 30? You can also provide for partial distributions at various ages.
- What powers should the trustees have?
Work With an Estate Planning Attorney
You'll have to decide on these and other issues when setting up a trust. More complex trusts designed for tax and asset protection purposes present even more choices. To draft a revocable trust, be sure to consult with a qualified estate planning attorney. Find an estate planning attorney near you today.
For more information about trusts and other important estate planning-related topics, check out the following articles: