I get a lot of inquiries about revocable trusts from individuals and families so I decided to focus this month on answering basic questions about them. With this kind of trust, in addition to enjoying the benefits of avoiding probate, explained in greater detail below, there can also be substantial tax savings. Remember Massachusetts is one of only a dozen states with a state estate tax.
What is a revocable trust?
A revocable trust is a document by which ownership of property and assets are transferred into a trust during the lifetime of the grantor or creator of the trust. The trust operates under the grantor’s social security number and acts as a substitute for a last will.
How is it different than a last will?
Unlike a last will, which takes effect only after death, a revocable trust is a “living” document. This means that it benefits the grantor while alive. The grantor can also be the trustee or name co-trustees of their revocable trust. Because the trust is “revocable” changes can be made to the document by the grantor during their lifetime.
Who is involved in a revocable trust?
Understanding the parties involved in a revocable trust is essential to understanding the
document and how the grantor can maintain control of assets while alive.
Grantor or Donor – The creator of the trust. Since the trust is revocable or changeable in
nature, the grantor or donor can make changes to the trust as necessary.
Trustee – The person or company that distributes and manages the assets in the trust according to the terms in the trust document. Grantors can name themselves as trustees in order to have full control of their assets while alive or they can name a co-trustee to act with them. The grantor can also name an independent trustee, such as a bank or trust company, as successor trustee who can act if the trustee dies or is incapacitated. The grantor can also name any adult with capacity as successor trustee.
Beneficiaries – Those who receive the benefits of the trust, such as property or other assets.
Grantors can name themselves as the first beneficiary in order to maintain control of assets while alive. In this case, grantors must name successive beneficiaries who will receive their assets after death. The grantor can also create sub-trusts for minor beneficiaries and supplemental needs trusts for disabled beneficiaries and to hold beneficiaries’ shares in trust for life to protect against divorce and creditors.
What are the key benefits of a revocable trust?
Avoiding Probate – Probate is the legal process of transferring ownership of individually owned assets (which typically include a home, works of art and other personal items, bank and brokerage accounts, etc.). During probate, the last will must be proven to be valid and all challenges and claims against the estate must be settled under court supervision. Because probate involves the court, heirs to the property must pay court costs and attorney fees. Furthermore, assets are “frozen” while proceedings take place and property distribution is delayed. The probate records are also open to the public and the names of the trust beneficiaries and value of assets become a public record. Because a revocable trust operates without court involvement, many of the disadvantages of probate can be avoided. First of all, heirs do not have to pay fees associated with courts. Because assets that are retitled to or owned by a trust or name the trust as beneficiary, they are not part of probate, and pass directly to beneficiaries after death. A revocable trust is much harder to challenge in court than a will. Unlike probate, the transfer of assets via a revocable trust is private and simple.
Minimizing Estate Tax – Although a revocable trust does not directly shield heirs from estate
tax, provisions can be made in the trust to transfer assets in order to avoid or reduce state
estate taxes. This is an especially useful tool for estate that have a net value above a certain
tax-exempt amount. For the federal estate tax, that amount is $12.06 million in 2022 (if
married, $24.12 million). In Massachusetts, the state estate tax amount is $1 million. Married couples with a trust can effectively double these exemption amounts. A married couple without trusts and whose assets total $1.6 million will pay estate tax of $70,800 and with funded revocable trusts pay ZERO!
Is a revocable trust right for me?
While a revocable trust works for many people and families, it will not be the perfect tool for everyone. Indeed, there are all sorts of trusts and ways to maneuver distributions depending on your unique financial objectives and values. There are trusts to protect disabled children, children from prior marriages, protect funds in the event a child has a subsequent divorce or addiction, remove assets from being taxed after death, or to plan distributions for second (or more!) marriages or remarriage down the road. Some of these trusts are called Supplemental Needs Trusts, Spousal Lifetime Access Trusts (SLATs), Irrevocable Life Insurance Trusts (ILITS), and Irrevocable Asset Protection Trusts to name a few. There are also certain trusts that the state will allow for people when qualifying for Medicaid.
We know them all. Give us a call if you’d like to learn more about what might work best for your situation and family.
