Estate planning typically begins with the creation of a will or a revocable trust, but their respective roles are not always understood. Wills are what people typically think of when it comes to putting their affairs in order and controlling how their assets are distributed at death. Revocable trusts, together with a simple “pour-over” will, are a widely employed alternative that can accomplish similar goals and more. Although individual circumstances vary, we believe that the benefits of a revocable trust and pour-over will structure can often outweigh those of a will alone, and can make a real difference to heirs.
Key Features: Wills and Revocable Trusts
A will takes effect at your death and covers property held in your name except for that which passes by other means, for example, jointly owned property, retirement accounts with named beneficiaries, life insurance proceeds with named beneficiaries and transfer-on-death (TOD) accounts. Wills must be executed in accordance with the formalities prescribed by state law. After your death, the will is presented to the probate court for authentication, and an executor is appointed who will then administer your estate and ultimately distribute your assets as provided in your will.
A revocable trust, also known as a living trust, takes effect when you sign it, and is “revocable” because you have the ability to change it or revoke it at any time during your life. Ideally, assets in your individual name should be retitled into the trust name. Typically, you are named as the sole trustee during your life, so that you maintain control of and access to your assets within the trust as before. At your death, the trust becomes irrevocable, and assets in it (together with those assets added by a pour-over will or beneficiary designation) are distributed according to the trust terms. A pour-over will transfers to the trust any assets you did not transfer during your lifetime. Beneficiary designations (for retirement accounts, for example) also can provide that payments be made to any trusts created under the agreement upon your death.
Benefits of a Revocable Trust
Both revocable trusts and wills are important documents, so what are some benefits to centering your planning on a revocable trust?
- Protection in Incapacity
During your lifetime, a revocable trust can permit a co-trustee or successor trustee to step in and protect the assets in the trust in the event you become incapacitated, without the need for a court to establish a guardianship or conservatorship. Although a durable power of attorney can provide similar authority, there may be difficulties or delays in establishing them with financial institutions.
- Timely Control of Assets
A commonly cited issue with wills is that they are subject to probate. While probate often isn’t an ordeal, it still can result in a delay—an issue that has intensified recently, with pandemic-related closures in some court systems causing multiweek delays in probating wills. Until the will is admitted to probate and the executor is appointed, all of your accounts are frozen. In contrast, the assets transferred to your revocable trust are not controlled by your will, and the co-trustee or successor trustee has authority over those assets immediately. This is important for several reasons, including the ability to provide funds that family members rely on for support, and the ability to actively manage assets in light of market conditions (something that may be particularly valuable in times of increased market volatility tied to factors such as rising rates, trade conflicts and concerns about global growth).
Wills are public documents that are filed with the court for everyone to see. While a court may ask to look at a revocable trust, it may not be placed in the public records. This is an advantage for publicity-shy celebrities, and for all those who value their privacy.
- Planning Equal to Wills
Generally, all of the planning you can accomplish with a will can take place through a revocable trust, including the establishment of additional trusts such as a generation-skipping or credit shelter trusts. In other words, a revocable trust can be the foundation of your whole estate plan.
- Ease of Administration
Trusts can provide administrative ease that wills cannot. For example, if you need to change the trustee of a trust created under your will, a formal court proceeding is required. With a revocable trust (which becomes irrevocable at your death), the change of a trustee for any “sub-trusts” can generally be accomplished with relatively simple paperwork.
- Reduced Exposure to Multiple Probates
For those with property in multiple states, placing those assets in a revocable living trust can be a way to avoid multiple “ancillary” probate proceedings.
While revocable living trusts have substantial benefits, there are issues to consider.
- Costs typically aren’t lower. Revocable trusts are not designed to save on taxes or fees while you are alive. Because the trust is revocable, all the income to the trust continues to be taxable at individual rates on your Form 1040, and the trust assets remain in your taxable estate at death. Moreover, the setup costs of a revocable trust and pour-over will structure are generally comparable to those of a will. Again, all of the planning contained in a will also can generally be accomplished through a revocable trust.
- The paperwork adds up. To take full advantage of a revocable trust, you need to transfer assets into the trust during your life. And that means changing titles on various accounts, including those with banks and investment firms, which is an effort that is sometimes neglected.
- Revocable trusts are not designed for creditor protection or Medicaid planning (but a will isn’t, either).
- Not all assets need to or can be transferred to your revocable trust. Although titles to bank and investment accounts are easily changed to your revocable trust, for some it may not be practical or cost-effective to transfer real estate because additional legal work is required (though it may be worth doing if you own property in several states, as noted above). IRAs and other retirement accounts cannot be transferred to a trust during your life and will pass according to the beneficiary designation (although the beneficiary can be one of the continuing trusts); “transfer-on-death” (TOD) accounts will automatically pass to named beneficiaries.
- Assets slip through the cracks. As useful as revocable trusts can be, it’s almost inevitable that some assets will be left out, whether because they are inconvenient, inappropriate or simply because they’ve been forgotten.
Fitting Trusts Into Your Plan
The likelihood that all your assets will not wind up in the trust during your life is a key reason to also have a pour-over will, which allows for the transfer of those assets to the trust. Certain other actions also must be accomplished through a will, including naming of a guardian for minor children.
Keep in mind that, like a will, revocable trusts should fit with other aspects of your estate plan—for example coordinating with beneficiary designations for retirement or TOD accounts. As part of your planning you should also have in place other key documents, including a health care proxy, “living will” and durable power of attorney. Even if you have a revocable trust, a durable power of attorney is also advisable. A power of attorney can be used to transfer assets to the revocable trust, sign tax returns and handle real estate closings for assets not in the trust, among other tasks. Finally, it will be important to keep your revocable trust up-to-date and make any changes as needed, depending on revisions to tax laws, changes in assets or significant life events.
In sum, we believe the various benefits of revocable trusts, including continuity and efficiency, make them well worth discussing with your attorney and other advisors, as part of your overall estate planning.
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