Trusts are extremely useful financial tools and they come in various shapes and forms. One common type to be aware of is the revocable trust. Put in the simplest terms, this is a trust that is alterable. Should you decide that you’d like to change certain provisions in the trust, add and remove beneficiaries or appoint different trustees then you are able to do this through a trust amendment. If you decide that the entire trust agreement is unsatisfactory, then you can also revoke the entire agreement – hence the use of the term “revocable” to describe the trust. The flexibility of such a trust may seem attractive and can be very useful in certain circumstances; however, there are certain legal and tax consequences that must also be considered.
Legal Structure of a Revocable Trust
A revocable trust is created while you are still alive and is often referred to as a living trust. One of the key characteristics of this trust is that any assets you use to fund the trust will still be considered your own property. This is unlike an irrevocable trust where assets transferred to the trust immediately become property of the trustee of the Trust. As you maintain ownership of the assets throughout your life, they will fall into your estate upon death, leading to estate taxes. These assets are also not protected from creditors – if you are sued then the assets in the trust are fair game.
Maintaining a revocable trust requires time, effort and continual monitoring of your estate plan. If such a trust is being used purely for estate planning, one might just consider using a will as a cheaper option. With the use of a trust, all of your assets must be placed in the trust in order to avoid probate. Therefore, you will still need to draw up a pour-over will for any assets you forget to put into your trust.
Why Should You Create a Revocable Trust
Despite some of the undesirable legal and tax consequences, there are also significant advantages to using this type of trust:
Planning for Mental Disability
In the event that one becomes mentally incapacitated, any assets that have been placed into the trust can be managed by a successor trustee specified when creating the trust. This may be more desirable than having the assets managed by a court-supervised guardian.
Most people want to avoid probate at all costs and using a revocable trust is one way of doing this. Beneficiaries are named in the trust agreement and any assets held in the trust at time of death pass directly to them. The entire probate process is avoided.
One of the main disadvantages of probate is that your assets become part of public record. With a revocable living trust, the trust document is kept private so that beneficiaries and assets are kept away from the public eye.
How to Set Up a Revocable Trust
The first step in setting up the trust is to establish what property you want to include in the trust. One may consider placing a house into a trust and this can be done even if it has a mortgage attached. Also consider any business interests such as assets from a sole proprietorship or stocks in a closely held company. Next, consult an experienced estate planning attorney and have that attorney draft the trust document which specifies the beneficiaries and the trustee or trustees. It’s important to note that because this will be a revocable trust, you will be able to change these details at a future date if you so choose.
The experienced legal team at Gary I. Handin, P.A., can review your draft trust document, assist you with adding specific provisions and identify anything that is missing. Contact us today to ensure that your trust is properly structured.