The benefits and shortcomings of a revocable trust

Planning for the transfer of your estate and other assets is one of the most important steps you can take to help your family. It’s a process that requires thought and the careful consideration of a range of options. A will is one method that nearly everyone should utilize. But is a will sufficient?

Depending on your circumstances and your assets, you may consider creating a revocable trust, also known as a living trust. Understanding the facts -- and dispelling some myths – can help you decide whether a revocable trust may be right for your planning needs.

A will and a revocable trust: You likely need both

A will remains a necessary document in all estate plans. It’s the document in which you typically name guardians for minor children, making it important for young families. But with the availability of revocable trusts, the purpose of a will is not as broad as it once was.

When you create a revocable trust, you (known as the “grantor”) transfer title to your assets into the name of the trust, typically with yourself as trustee. This transfer of title, or reregistering assets in the name of the trust, is known as “funding” the trust. During your lifetime, you are the beneficiary of the trust and can manage the trust property the same way as if the trust did not exist. You can revoke or amend the terms of the trust at any time. Your will typically then acts in tandem with your trust, directing any assets you have not transferred into your trust during your lifetime to be added to the trust following your death.

A revocable trust provides a way to ensure the continued management and preservation of your assets, should you die or become incapacitated, and allows the avoidance of a probate court proceeding after your death. Upon your passing, the successor trustee (typically a relative or a trust company) that you name in the trust document can immediately take over management. The trust then sets forth how the trust assets are to be distributed, without the requirement of the probate process.

If you don’t have a revocable trust and you are comfortable requiring your heirs to go through a probate court proceeding at your death, a will can provide for a general distribution of your assets. If you have assets that would be more difficult to manage through a court process, and want to avoid that time, publicity and expense, a revocable trust is likely for you.

Advantages of revocable trusts

Continuity of management

A revocable trust is probably the best way to ensure that your property remains available to be used for your benefit, should you become physically or mentally incapable of managing your own affairs. While continuity of management is also possible when a durable power of attorney is signed, third parties such as banks, brokers and transfer agents often have more difficulty in dealing with a power of attorney than with a trust agreement. And, if the designated attorney is unable to act, the power of attorney may not be usable.

If you become incapacitated and you have neither a revocable trust nor a power of attorney, an expensive and lengthy court proceeding is required to appoint a conservator before your property can be used to benefit either you or your family. Even after a conservator has been named, continued court supervision over the management of investments and disbursements is usually required. This can include annual bond fees and additional legal and accounting fees.

Avoid probate

Probate is the legal process required to determine that a will is valid and oversee the administration of your estate. Because probate can be costly and time consuming, avoiding probate is one of the primary benefits of a revocable trust. Avoiding probate also preserves the privacy of your information, as the probate court process is generally open to the public.

The extent of the benefits of avoiding probate may vary from state to state, but your circumstances also may make avoiding probate especially valuable. For example, avoiding probate may be a significant benefit if you own real estate in more than one state, because of the cost, publicity and logistical hassles of needing probate proceedings in multiple states.

Availability of assets at death

Assets in a revocable trust at the grantor’s death can be immediately available to your successor trustee. This can be crucial to raise cash to pay estate taxes, administration expenses and debts immediately after death, without waiting for a probate decree or issuance of preliminary letters. If the trust is funded prior to death, the property remains in the trust’s name before and after death and is immediately available for liquidation if needed.

Simplified asset transfer via signed originals

For probate court proceedings, original wills must be provided to avoid a presumption that the will was revoked. Typically, one original must be produced at death. Since revocable trusts are not probated, multiple originals may be signed and one may be utilized to administer property held in the trust at death. Having a revocable trust, therefore, may simplify the transfer of property at death if the original will cannot be located or has been destroyed.

No interruption in investment management

One of the primary benefits of a revocable trust is the ability to provide uninterrupted investment management should the grantor become incapacitated, as well as after the grantor’s death. Since the assets were previously transferred into the trust’s name, there is no need to reregister securities after death. In addition, depending on the cash needs and investment objectives of the grantor’s estate, there may be no need to develop a new investment strategy.

Ease of administration of new or continuing trusts

When a trust is created under a will, the trust becomes subject to the court’s jurisdiction; court involvement is required to implement certain changes, such as changing a trustee. This can often lead to unnecessary expenses and delays as documents need to be prepared and the court needs to review and approve the changes. If a trust is created under a revocable trust, it is not subject to the court’s jurisdiction and these changes can be made without court involvement.

Drawbacks of revocable trusts

In comparison to the benefits of revocable trusts, the drawbacks are fairly limited:

Reregistration of property

As noted, to be included in a revocable trust, property must be reregistered in the name of the trust.

Cost

In comparison to the cost of drafting a will, the attorney fees associated with drafting trust documents may be slightly higher. But in many cases, there may be no difference.

Myths about revocable trusts

Myth: Revocable trusts save taxes.

Revocable trusts do not save income taxes, nor do they save estate taxes. The property in a revocable trust is treated as if it were the grantor’s own property for both income tax and estate tax purposes.

Myth: Heirs cannot challenge a revocable trust.

Revocable trusts, like wills, can be challenged by dissatisfied heirs.

Myth: Revocable trusts protect assets from creditors.

This is incorrect. Creditors may reach the assets during the grantor’s lifetime and after death.

Whether a revocable trust is appropriate for you and your beneficiaries depends on your specific needs and circumstances. Although a will may be sufficient if you have a simple balance sheet and you live in a state where the probate process is not too onerous, in most cases the advantages of creating a revocable trust will outweigh the disadvantages. If you are going to invest in an estate plan to protect your affairs, a revocable trust often is the place to start.