You may have heard of a Revocable Trust as a way of organizing your estate planning.
To explain Revocable Trusts, it’s necessary first to understand, what is a trust?
A trust is a contractual arrangement in which some property is given by one person (the Grantor) to another person (the Trustee) to hold for some defined set of purposes for the benefit of some defined group of people (the Beneficiaries). The role of trustee is a fiduciary role, similar to that of the executor of an estate, meaning that the Trustee has no personal ownership of the assets entrusted to her, only a managerial role to hold the assets for the Beneficiaries’ best interests, in accordance with the purposes expressed in the Trust document.
There are many kinds of trusts, each with different functions and features. Some trusts are used for asset protection or tax avoidance. These are not the functions of a Revocable Trust. The essential function of a Revocable Trust is to avoid the court procedures that are needed to open your estate after your passing (the Probate procedures, if you have a will, and the Administration procedures if you don’t.)
A Revocable Trust is conceptually very simple. You, as the Grantor, form the trust. You transfer your assets into the ownership of the trust. You also serve as the Trustee, which enables you to manage and control the assets with no limitations during your lifetime. You also state in the trust how your assets should be distributed after your passing — in this respect, the Revocable Trust functions very much like a will.
The crucial legal difference is that a trust is legally effective the moment you sign it and transfer assets into it. By contrast, when you sign a Will, it becomes legally binding for future use, after your death, and subject to the Probate procedures, with all the bureaucracy, delays and will contests they may entail.
Because a trust is already effective during your lifetime, it continues in effect after you’re gone, without court approval or any other procedures. In forming the trust, you will name someone to succeed you as the Trustee, who will then have the same functions as the Executor under your will. (In fact, we will always prepare a Will alongside your Revocable Trust, to ensure that any non-trust assets or issues can be addressed, and the Executor will be the same person as the Successor Trustee.) This allows the trust assets to be administered immediately following your death. It is literally the case that the settlement of an estate through a Revocable Trust can be finished before the settlement of an estate through a Will even begins.
Who Needs a Revocable Trust?
The question of whether you should have a Revocable Trust is entirely a question of whether you have a reason to avoid Probate or Administration procedures after your death. There are several situations in which the avoidance of Probate or Administration is particularly desirable:
— Contentious or Unknown Relatives. If your closest relatives are contentious among themselves, or might not accept the wishes that you’ve written in your will, or if you have little active relationship with your closest relatives, or no known relatives — these are all situations in which Probate or Administration could be very difficult.
The closest relatives are central to the post-death court procedures, because the law makes the presumption that they are the people most interested in your estate. As such, any plans you make that differ from this must be reviewed by the court and can be contested by the relatives.
The lack of relatives — not knowing who they are, or where they live, e.g., if they are back in a country from which you or your parents emigrated — is a stealth problem. The court requires information about the relatives, and if it’s not readily available, it must be sought out diligently through genealogy and other efforts. In this way it can be as complicated and expensive to deal with unknown relatives as it is to deal with contentious relatives.
— Privacy. All court records are public records, including Probate or Administration filings, and therefore, a Will becomes public, too. It takes some effort to view these records, so most private citizens are safe from such intrusions. But if you have anything sensitive or controversial in your Will, or if you are a celebrity or public figure of any kind, there may be curious parties, or journalists, snooping around. I have on a number of occasions been called by journalists to comment on the wills of deceased celebrities that were obtained through the court records (I never do comment on them), and I have had one case where a newspaper article was written about my client’s family conflict over their father’s will. Unlike a Will, a Revocable Trust is an entirely private document, which requires no court filing for its effectiveness.
— Ownership of Property in Multiple States. When your Will is approved and your executor is formally appointed by the court, the Executor receives his authority through a document known as Letters Testamentary (a strangely plural name for a single document). He can then take control of all your assets in your home state, and often can manage financial assets and other estate business in other states. But some assets and estate business — and always the management of real estate — require Letters Testamentary from the state in which the property is situated. So if you live in New York but own a vacation home at the Jersey Shore or in Florida, or if you inherited family property in Iowa, or own rental properties in various places, then a Revocable Trust may be very desirable. Obtaining Letters Testamentary in other states requires that you conduct Probate procedures in each state, and hire local counsel in each state to perform it for you, and all of this can only be done after the Letters Testamentary are issued in your home state. Also consider that a property is not just an asset but a responsibility and a generator of liabilities — property taxes, insurance obligations, utilities, slip-and-fall risks. Until Letters Testamentary are issued in the state where your property is located, no one is legally able to manage the property, authorize repairs, or deal with tenants.
Who Wants a Revocable Trust?
The situations described above are the conditions in which a Revocable Trust is, arguably, necessary for smooth estate settlement. Revocable Trusts are attractive for some other reasons as well:
— Trust as Power of Attorney. As noted above, a Revocable Trust is a document that is effective during your lifetime. As such, it has some additional benefits that a Will cannot offer. The major one is that it can be used to allow your Successor Trustee to manage your assets in any circumstance in which you are living but unable to handle your own affairs. This may be a short-term situation, such as a brief hospital stay, or it may be a long-term situation such as dementia. In this way the Revocable Trust can serve as a kind of Power of Attorney — and it actually has greater legal force than a power of attorney as to the management of assets.
— Convenience. Even if you are not a celebrity or a multi-state property owner, you may feel that there’s simply no need to bother with the court procedures, and would prefer for your survivors to receive your estate more quickly and simply and without incurring legal expenses in your estate after you’re gone. That’s a perfectly good reason to do a Revocable Trust. If you are willing to spend a bit more than you would for a will, it is a very worthwhile amenity to have.
— The Courts are Pretty Awful. I have been helping clients with estate planning for over a decade. Because Revocable Trusts are more expensive to prepare and set up than a Will, I have always taken care to recommend them only to clients with the “need” situations noted above, and to offer them as optional for everyone else.
As I write this in January 2019, I have reached a new view on this. I have seen the court procedures grind to a slower and slower pace over the years. The Probate and Administration procedures were once an inconvenient bureaucracy; I now find them to be an increasingly impenetrable bureaucracy. That’s not to say that the procedures don’t eventually reach their conclusion, but I do find that they take longer, more unpredictable, and entail greater bureaucratic burdens than in the past.
As such, I now feel that if you are going to the effort to plan for the distribution of your estate, it makes sense to use a Revocable Trust, so that your well-crafted plans are not subjected to the burdens of the court procedures.
Making it Work.
As noted above, the Revocable Trust works for assets that are held in the name of the trust. The trust is not a personal power for a broad range of actions (as is the appointment of an Executor). It is simply a form of ownership and a way of allowing a successor to manage property that the trust owns.
Therefore, the trust will only work if you transfer your assets into it. There are some circumstances in which it may make sense not to put everything into the trust, and there are some assets (particularly retirement accounts) that, by their legal nature, do not go into the trust. But it is generally advisable to transfer all assets to the trust. See the last section of the Estate Planning — after signing page for more information on how this is done.
No taxes are incurred when you transfer assets into the Revocable Trust, nor does it lead to any tax savings. Putting assets in the trust does not impede your access to or control over your assets. Since you are the Trustee, you can manage your assets with the complete freedom that you have always had.