By: Matthew Getty
I frequently receive questions about revocable trusts from clients who have heard something about them but aren’t quite sure what they are. Sometimes these clients have become convinced that they need to have a revocable trust, but they don’t have a clear understanding of what a trust will do and whether it is appropriate for their situation.
A revocable trust is essentially a will substitute. Its primary purpose is to dispose of your assets after your death. In some circumstances it is advantageous to use a trust for this purpose instead of a will (although, as discussed below, you still need to have a will if you have a trust). See: Do I Need A Will? In my view there are four main uses for a revocable trust, any one of which might be a sufficient motivator to use one, depending on your situation and preferences:
- Probate Avoidance. If you own assets as trustee of your trust they are not subject to the probate process. Your successor trustee can simply step in and begin to administer your estate without going through the various steps that the probate court proceeding requires. That is not to say that administering a trust should be haphazard or informal, but the trustee has authority to move quickly.Why, you might logically ask, would one want to avoid probate? In my experience, client opinions differ on this subject. I have had some clients who have been through very difficult probates with family members and wish to avoid it at all costs. Other clients have been through probate quickly and easily. Yet other clients simply do not care one way or the other because…well, they’ll be dead at the time. I should note also that if you own Vermont real property and die as a resident of another state your Vermont real property will be subject to an ancillary probate proceeding in Vermont. This could mean that there will be court proceedings in two states, with the associated time, complexity, and potential expense. One way to avoid that result would be to fund your real estate into a revocable trust. You should, of course, consult with legal counsel to determine whether that solution or another one is appropriate for your situation.What is my opinion? The answer to that is the same as the answer to all lawyer questions: It depends. It depends in part on your own preference, as just discussed. It also depends on the nature of the assets in your estate and the dynamics of your family. A probate proceeding is a great forum for family turmoil to manifest itself. In addition, you should be aware that the probate record is technically open to the public. I have been through a variety of probate experiences in my practice. Your mileage may vary.
- Disability Planning. This feature is related to the first one. If your assets are held in trust, your successor trustee can step in and manage them in the event that you are unable to do so. As human longevity extends, it is increasingly likely that people will go through a period of prolonged incapacity before they die. Of course, incapacitating events are not always anticipated. In this sense a trustee acts much like an agent under a power of attorney, but a trust tends to be a more powerful instrument because the trustee is the legal owner of the assets and as such tends to receive less pushback from third parties. See: Document Updates The use of a revocable trust can also be more convenient and efficient than relying on an involuntary guardianship proceeding whereby another individual petitions the court for authority to manage your affairs.Each of these first two advantages could potentially be useful to almost anyone and therefore motivate the creation of a trust, depending on your concerns. An attorney can review your situation in order to determine if it is appropriate for you.
- Delayed Distribution. If you wish to delay distributions to anyone, you need to use a trust. You could create a trust through a will (a “testamentary trust”), but if you do so you miss out on the first two advantages above. In addition, a full trust agreement tends to be more detailed, and it is simply more efficient to prepare it as a separate document. Some motivators to put delayed distributions in place include minor children; a blended family due to a second marriage; or a disabled or spendthrift beneficiary.
- Estate Taxes. For some, the idea of a trust sounds like something that would only be for the very rich. The above examples demonstrate that this is not the case. It is true, however, that revocable trusts are used for estate tax planning purposes. The federal estate tax exemption is currently so high that it affects very few Vermonters. Vermont has its own estate tax with an exemption of $2.75 million per person. If your estate, or the combined estate for you and your spouse, is approaching that amount, you might wish to speak to an attorney about some tax planning.
I cannot stress enough that your planning must be specific to your situation. I have seen both wills and trusts that simply did not align with the assets in play, particularly for those that have significant retirement accounts or jointly owned assets. An attorney who does not review these details in the context of giving you advice is doing you a disservice.
Finally, if you do use a trust, you should know that you will also still have a will. This will would act as a backup to the trust. In the event that any asset does end up in probate, the will directs that the asset be poured over into your trust. Therefore, the terms of the trust will ultimately govern how the assets in your estate will be distributed. Of course, it is always best to go through a thorough trust funding process so that no assets do end up in probate and you and your heirs can enjoy the first two advantages noted above.