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Revocable Trusts Avoid Probate & Provide For Long Term Care Print E-mail

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revocable trust is a trust created during the life of the grantor and may be amended or revoked by the grantor during his lifetime as situations or desires change.  The person creating a revocable trust is referred to as the “grantor.”   Married couples may form joint trusts in which each is a grantor.  The initial trustee of a revocable trust often is the grantor.  The trust instrument provides for successor trustees when the initial trustee(s) are unable to continue in that role or die. 

The trust estate of a revocable trust is the property transferred to the trust by the grantor.  The trust estate normally includes bank accounts and securities.  Often real property, residential or investment, is placed in a trust.

During the grantor’s lifetime and so long as he continues to serve as trustee the operation of the trust is virtually identical to how the grantor’s financial affairs were conducted prior to creation of the trust.  When the grantor ceases to serve as trustee, the successor trustee then conducts the business of the trust, which is to care for the grantor during remainder of his life and to manage and distribute the trust estate as directed by the trust upon the death of the grantor.  Therefore, a trust has a living function and a testamentary function.

Fortunately, in most jurisdictions, there is little cost to transferring real estate to a trust that is created by, and benefits the persons owning the real property.


The downside of creating a revocable trust is the initial expense.  A trust typically is more complicated than a Will and is more expensive to create.  Also, in order to make the trust work properly, it is necessary to transfer title of property into the trust.  Bank accounts will have to be changed, title to securities accounts will have to be changed, and title to real property may have to be transferred as well.  All these matters require time and effort.  Fortunately, in most jurisdictions, there is little cost to transferring real estate to a trust that is created by, and benefits the persons owning the real property.  However, the cost of transferring title in each applicable jurisdiction needs to be checked prior to creation of a trust.  In most circumstances the cost is nominal and limited to the fee for filing papers in the land records.

There are several upsides to having a revocable trust. 

First, it avoids probate time and expense.  However, a revocable trust does not save estate taxes.  As the property titles are transferred during the grantor’s lifetime and the trust continues after the death of the grantor, there is no transfer upon the death of the grantor.  Accordingly, the trust estate is not subject to probate proceedings. 

Second, a revocable trust provides continuity when the grantor becomes incapable of caring for himself and needs a mechanism to manage his property and to provide for his long term care.  A revocable trust avoids the necessity to appoint a guardian of the estate of the grantor through a court proceeding which is a complex and expensive process. 

Third, the revocable trust usually will contain the desired estate plan for distribution of the trust estate following the death of the grantor.  The grantor’s estate plan could include sub-trusts for various classes of beneficiaries.  The revocable trust can provide for charitable contributions or other distributions as desired by the grantor.  The trust could be named the beneficiary of life insurance policies and of retirement plans, which then would be managed and distributed as set forth in the trust.  Typically, the grantor creates a “pour over Will” to transfer property not previously placed in the revocable trust into the trust upon the grantor’s death. 

Third, the revocable trust usually will contain the desired estate plan for distribution of the trust estate following the death of the grantor.  The grantor’s estate plan could include sub-trusts for various classes of beneficiaries.  The revocable trust can provide for charitable contributions or other distributions as desired by the grantor.  The trust could be named the beneficiary of life insurance policies and of retirement plans, which then would be managed and distributed as set forth in the trust.  Typically, the grantor creates a “pour over Will” to transfer property not previously placed in the revocable trust into the trust upon the grantor’s death.
 
Fourth, so long as the grantor is competent to manage his affairs, the revocable trust may be amended to adapt to changed circumstances, much as a Will can be amended or rewritten.  Indeed, if the grantor so chooses, the trust can be revoked and all the property can be conveyed back into the name of the grantor.

A revocable trust does not provide estate tax savings as the property in the trust is considered a part of the taxable estate of the grantor.   Usually, the trust’s income is included with the income of the grantor on his income tax returns.

In most cases, persons creating a revocable trust would also create a pour over will, a durable power of attorney authorizing a trusted individual to act on his/her behalf (“durable” means it survives mental disability) and a health care declaration, living will or power attorney  as authorized in the grantor’s jurisdiction of domicile.  Each of these instruments, including the trust, can be changed as circumstances dictate.  Therefore, Hughes & Bentzen recommends that there be a regular, periodic review to keep the estate plan current with developments during the life of the grantor.



 
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