Revocable Living Trusts

The revocable living trust has become such a popular estate planning tool that there is a danger that people are establishing them without thoroughly understanding all of the consequences of doing so.

Advantages

A revocable living trust entails an individual's transfer of assets to a trustee who is appointed in the trust instrument. The individual retains the powers to revoke or amend the trust, and he will normally receive the income generated by the trust for the period of his life. The chief advantages of such a trust are that (1) it establishes an estate plan for the individual ("settlor") while he is still living, thus securing professional management of his assets during his life, with a smooth transition at his death since, at that time, the trust will serve as the equivalent of a will; and (2) the cost and delay of probate are avoided because, unlike assets passing under a will, assets passing at death under a revocable living trust are not subject to probate. At the settlor's death, the trustee of a revocable living trust can continue his management of the assets without interruption and can start carrying out the trust's post-death directions without the need for notice or court approval.

Another advantage is gained if an individual owns real property outside of his home state and transfers it to a revocable living trust. If the individual died owning such property without having transferred it to a revocable trust, it would almost certainly be necessary for his executor to open what is known as an ancillary administration in the proper court of the state in which the out-of-state realty is located. Such action is not needed if the realty has been transferred to a revocable trust.

Steady management of the settlor's assets can be maintained where the settlor, who typically is the initial trustee, becomes incapacitated. The revocable trust can provide that the successor trustee is to assume his trustee status upon the settlor's incapacity. Such a provision can eliminate the need for a court proceeding and the appointment of a guardian. After the settlor's death, there would be no delay in the transfer of assets to the ultimate trust beneficiaries. Therefore, there would be no need for the beneficiaries to take actions such as hiring an attorney, filing court papers, or petitioning the court for temporary living expenses pending probate.

Disadvantages

Disadvantages associated with a revocable living trust primarily involve the formal changes that must be made in order to fund the trust. Because legal title to all of the property to be transferred to the trust must be in the trustee's name, stocks must be reregistered and title to promissory notes, real estate, partnership interests, and any other assets must be placed in the trustee's name even where the settlor is the initial trustee. Such a process can be burdensome.

Because the trust will be operated both during the settlor's life and after his death, it is likely that the total cost of an estate plan centered on a revocable living trust will exceed an estate plan that takes effect only at death. A professional trustee will usually charge on an annual basis, while an executor's fee will normally be a one-time charge. Of course, if the settlor acts as the sole initial trustee, trustee's fees could be greatly reduced.

A revocable trust does not alter the tax liability of the settlor or his estate. Since the settlor will normally be the income beneficiary of the trust, he will be taxed on that income. The settlor's power of revocation will cause the trust fund to be included in the settlor's estate for federal estate tax purposes. Thus, taxation is a neutral factor in deciding whether to execute a revocable living trust. Still, the numerous factors that do affect such a choice must be weighed carefully. The assistance of a skilled attorney is recommended.