Revocable trusts, also known as “living trusts,” have been around for many years, but they have gained in popularity in recent years as a result of both advertising campaigns and seminars. Although a revocable trust may be appropriate in certain circumstances, too often an individual creates such a trust without the benefit of careful analysis of whether such a trust is appropriate for his or her particular situation.
Avoiding Probate. In certain circumstances, the process of probating a will can be onerous – for example, if an individual does not have relatives who are easily identified or are difficult to locate. Under state law, those relatives who would inherit a decedent’s estate under the state’s intestacy law (i.e., if the decedent did not have a will) must be given notice and an opportunity to object to probate of the decedent’s will. If a decedent was never married, had no children and did not stay in contact with any of his relatives, probate of the decedent’s will might be time consuming and costly. He might have left his property to his closest friends of many years, but in order for the will to be probated, the court would require that a search be conducted to locate his next of kin and notify them of his death. In the typical situation, however, where family members are known and in contact with the decedent, in most states the probate process is completed within a couple of weeks, at minimal expense. In New York, for example, probate filing fees vary according to the size of the probate estate, starting at $45 and increasing to a maximum of $1,250 for a probate estate valued at $500,000 or more.
If all of a decedent’s assets have been transferred to a revocable trust during lifetime, the estate will save the probate filing fee and legal expenses incurred in connection with probating the will at death (to be contrasted with the costs of trust administration during life). The legal fees that would have been incurred in connection with a probate proceeding usually are modest, except in complicated cases, and other estate administration costs (for example, changing ownership of assets and preparing estate tax returns, if required) would likely be the same, whether the decedent had a will or a revocable trust.
Will Contest. Another advantage that is claimed in favor of a revocable trust is where family problems indicate that a disgruntled family member may contest the will. While a revocable trust may provide greater protection than a will in a contested situation, it is not a failsafe protection. If there is a probate proceeding for a simple pour over will, the court may require that the revocable trust be submitted as part of the court file. In New York, for example, the decedent’s next of kin as well as other individuals who have been adversely affected by amendments made by the decedent to the trust must be notified. Thus, if the decedent hoped to make his testamentary dispositions private by creating a revocable trust, this objective may not be attainable. Further, even if there is no probate proceeding because all of the decedent’s assets have been transferred to a revocable trust, an interested party can institute a court proceeding to invalidate the trust.
Asset Management. A revocable trust may offer advantages to an individual who wants to plan for the possibility that he will become incapacitated. An alternate or co-trustee would be able to step in and manage his assets, pay bills and take care of his affairs without having a guardian appointed. A durable power of attorney may accomplish these asset management objectives just as well as a revocable trust. However, if an individual likes the idea of a revocable trust but does not want to transfer assets to the trust as long as he is competent, the power of attorney may provide that the agent may establish (or fund) a revocable trust if the individual becomes incapacitated, with the agent and a designated corporate fiduciary as co-trustees.
What a Revocable Trust Will Not Do. A revocable trust will not save taxes. There are no income tax benefits since the grantor is treated as the owner of the trust and all trust income is reported on the grantor’s personal income tax return. Neither will a revocable trust save estate taxes since all assets in the trust will be included in the grantor’s estate for federal and state estate tax purposes. The same tax planning provisions that should be included in a will (such as marital deduction planning) should be included in a revocable trust and, as with a will, must be carefully drafted. Creating and funding a revocable trust will entail the additional costs of transferring assets into the trust during lifetime (for example, the deed to the house, car title, bank and brokerage accounts, etc.). Probate does not unduly delay the administration of the estate. Long delays are commonly the result of an extended tax proceeding, which would be the same whether the decedent’s estate was disposed of by will or by revocable trust.