What is a Revocable Trust and Why Would You Want One?
Over my decades of practice, I have become a strong proponent of revocable trusts as a means to avoid probate and, more importantly, to provide for asset management in the event of incapacity. Revocable trusts are incredibly flexible and can achieve many goals, including tax, long-term care and asset protection planning. Revocable trusts are sometimes called “living” trusts or even “loving” trusts, but these are simply terms developed by some practitioners to market a longstanding estate planning tool.
Essentially, a revocable trust is a new financial entity that you create. As the creator, you are called the “grantor” or the “donor.” You are also at least one of the beneficiaries of the trust and can serve as the sole trustee or as one of a number of co-trustees. The trustees manage the assets in the trust, which can include real estate, bank accounts, investments, and tangible property, such as fine art, under the terms set forth in the trust document. In principle, a trust document can be as short as this:
I, Hillary, hereby create this trust as grantor and trustee. If I ever become incapacitated or upon my death, my husband, Bill, will step in as trustee. During my life the trustee may distribute principal and income to me or on my behalf as the trustee it in its sole judgment determines appropriate. After my death, all of the remaining income and principal shall be distributed to my good friend, Barack. I may amend or revoke this trust at any time by delivering a writing signed by me to any trustee.
Technically, this trust works because not all of the three roles—grantor, trustee and beneficiary—are the same person. While Hillary fills all three roles today, she is not the sole beneficiary, since Barack will get the trust funds when she dies. If he were not named as a successor beneficiary or “remainderman,” Hilary would be deemed to own the trust property personally instead of as trustee. The fact that Bill is appointed as successor trustee doesn’t help, but naming him as co-trustee from the outset would make the trust valid even if Barack were not named as the remainderman.
Of course, trusts in fact are much longer as they cover many possible occurrences and legal matters. But before we get into those issues, let’s discuss what this trust accomplishes:
First, whatever Hillary places into trust during her life will pass to Barack at her death without going through probate, avoiding probate’s cost, delay and publicity.
Second, in the event of incapacity, Bill can step in and manage the trust property without any fuss. While he might also do so through a durable power of attorney, we have found that banks and other financial institutions are much more comfortable with trusts. They have been known to reject durable powers of attorney that are more than a few years old or to require that the drafting attorney certify that the power of attorney has not been revoked. (This puts the attorney in an awkward position since he cannot really know what the client did in his absence, but he’ll usually sign the affidavit to help out the client’s family.)
Especially with older clients, who are more likely to become incapacitated or to be the victims of scams aimed at seniors, we recommend that they appoint co-trustees in addition to successor trustees. If Hillary were to follow this advice, she would name Bill as her co-trustee and Chelsea as successor trustee. Bill’s appointment as co-trustee would make his ability to step in in the event of Hillary’s incapacity or death entirely seamless. In addition, as we’ve seen more seniors become targets of scams, a co-trustee can monitor financial activity to stop any drain of funds before it goes too far.