The Revocable Trust
What is a trust and what is a revocable living trust?
A trust is a box that holds assets. A trust is created when one person (called the Trustor, Settler, or Grantor) transfers to another person or
entity (called the Trustee) a property interest to be held for the benefits of a
beneficiary. If the trust is created during the Trustor’s lifetime, rather than in his or her will, it is called an intervivos or living trust. When the Trustor retains the right to dissolve the trust, it is called a revocable trust. Conversely, if the Trustor does not have the right to change or dissolve the trust, it is irrevocable. A revocable trust often becomes irrevocable when the Trustor dies.
What are the advantages of a revocable living trust?
Most of the advantages associated with the revocable living trust involve the fact that the assets owned by the revocable living trust pass to the beneficiaries without probate. If the assets are titled in the name of the revocable living trust and the Trustor dies, a successor trustee simply steps in and administers the assets according to the instructions outlined in the trust agreement. In Texas, it is generally not difficult, time consuming, or expensive to probate a well drafted will. However, a revocable trust is often recommended for the person who:
- Desires privacy in the settlement of his or her estate
- Has real property outside the State of Texas
- Has a complex estate plan involving business interests, a blended family, or significant estate tax planning
- Anticipates the estate plan will be contested
Some people particularly desire privacy in the settlement of their estate. They do not wish for their will and the assets governed by this will to be of public record. For example, if a person has a large estate, is leaving a bequest to a non-family member, or does not want an ex-spouse to have information regarding the administration of the estate, a revocable living trust may avoid this information becoming of public record.
How will the revocable trust help me if I own property located out of state?
People who own real property outside the State of Texas may be able to avoid the ancillary probate of that property by placing the property into a revocable living trust. Generally speaking, ancillary probate involves hiring another attorney in the jurisdiction where the real property is located. The procedure differs from state to state but usually involves filing a certified copy of the probate with a congressional certificate in the county, parish, or township where the real property is located. It may also require an oral hearing. The expense and time associated with ancillary probate varies widely from state to state.
Why are revocable trusts effective in complex estate planning situations?
In general, blended families, nontraditional families, business owners, and moderately wealthy to wealthy individuals require more complex estate planning. In these situations it is often advantageous to utilize the revocable living trust to avoid unnecessary delay in the management of a person’s estate. If the management and distribution of the estate is governed by a will, it could take some time to have the will admitted to probate, especially if the will is challenged. Further, privacy is a critical concern for many business owners and moderately wealthy clients. If a person anticipates a will contest, he is likely better off creating and funding a revocable living trust for two main reasons. First, the trust is not of public record and no person has the right to know of its contents besides: the trustee, the beneficiary, the IRS, and other interested persons. Second, it is often more difficult to contest a trust as opposed to a will, especially if the Trustor was also trustee of the trust.
What are the possible disadvantages of a revocable living trust?
Perhaps the most important disadvantage of a revocable living trust involves the fact it requires more time and effort from the attorney and the client to create the trust and fund the trust. In other words, after the attorney has drafted the trust and the client has signed it, the client and the attorney must work together to fund the trust. Funding is the process of placing assets in the name of the trust or dovetailing beneficiary designations with the trust. The funding of a revocable living trust is often referred to as “pre-settling the estate.” Oft en, the revocable living trust is more expensive to create and fund and saves little in administration expenses after the death of the Trustor.
If I have a revocable living trust do I need a will?
Yes. A pour-over will should accompany the revocable living trust. A pour over will enables assets which were not placed into the trust before your death, or assets received aft er your death, to funnel into and be administered pursuant to the terms of the revocable living trust. If all your assets are owned by the revocable living trust or pass to the revocable living trust via a beneficiary designation or pay on death provision, then the pour-over will would not require probate. However, the pour-over will is prepared just in case an asset escaped being placed into the trust before your death. The pour-over will also distributes your personal property.
Once I have a revocable living trust, how do I fund it?
The trust is a box and funding is the process of placing your assets into the box. When you sign your revocable living trust, you will receive a funding packet that sets out a list of your assets and provides instructions regarding how to place each asset into the revocable living trust. Our funding department, will guide you through the funding process. Depending on the type of asset, procedures may be different for funding. For example, to place real estate into a trust, a deed must be prepared. Transferring a brokerage account or bank account into a revocable living trust requires styling the account in the name of the trust. No change of ownership is necessary on life insurance, annuities, and retirement plans. Instead, the beneficiary designation should name the surviving spouse and/or revocable living trust as the beneficiary, depending on a variety of factors. Be aware that the revocable living trust is an alter-ego of you, it does not have a separate tax identification number, and does not require a separate income tax return so long as it remains revocable.
Will the revocable living trust protect my assets?
No. You may read about asset protection tools in an article entitled “Choice of Business Entity in Texas,” which was published in the Houston Journal of Business and Taxation. This article and was written by Mike Riddle, Christine Butts, and Karen Akiens. It is available on our website and may also be requested by you.
Will the revocable living trust enable my family to more easily manage my estate if I become incapacitated?
Probably. If you become incapacitated, the successor trustee of your revocable living trust will manage the trust. You will remain the beneficiary of the trust. Since some institutions are reluctant to accept authority under a durable power of attorney, the revocable living trust is often used to plan for individuals who will likely become incapacitated.