SOME BASIC FACTS ABOUT REVOCABLE TRUSTS

WHAT IS A REVOCABLE TRUST?

The Revocable Trust has been a common estate planning tool for many years. A Revocable Trust is often also referred to as a "Living Trust."

A Revocable Trust is created by a trust agreement signed by the person who is setting up the trust (usually called the "Donor") and the persons and/or trust company that will act as the Trustee or Trustees. The Donor transfers his or her assets to the trustees and the assets are registered in the name of the trustees.

The Revocable Trust agreement describes how the trust assets will be handled during the Donor's lifetime. It also describes how the trust assets will be disposed of when the Donor dies. Thus, the trust serves as a will substitute by allowing the trustee to distribute the assets according to the terms of the trust agreement without any action of a probate court.

WHAT DOES A REVOCABLE TRUST AGREEMENT CONTAIN?

We will discuss with you the details of the provisions to be contained in your living trust. Since a Revocable Trust agreement is a legally binding contract between the trustees and you, it is important that the agreement be prepared with care and by someone who is familiar with the legal consequences of a trust agreement. The Revocable Trust agreement will contain many provisions governing the trust which include the following:

  °       A specific clause giving you the power to revoke and amend the trust agreement as you desire anytime in the future.

  °       A specific clause giving you the right to control the Investment of the trust assets if you wish to keep that responsibility.

  °      Provisions that allow the trustee to pay your expenses and manage the trust assets if you become incapacitated.

  °      Provisions that precisely describe how the trust assets will be disposed of in the event of your death.

  °     Provisions that name additional trustees or replacement trustees.

WHO CAN ACT AS A TRUSTEE?

You can act as one of the trustees of your Revocable Trust. If you are married, it is possible for your spouse and you to act as the trustee of one another's trust. If you wish, you can also name your children, friends or business associates to act as trustees. If you wish to have professional management of your assets, you can name a bank or trust company as a trustee. If you decided to act as one of the trustees of your own trust, you will probably not want to have more than one other person as a cotrustee to act with you during your lifetime. It is usually advisable to have no more than three trustees named to act in the event of your death. However, if in your circumstances you would like to have more than three trustees, you are able to name as many trustees as you wish.

WHAT IS THE TAX EFFECT OF A REVOCABLE TRUST?

The Revocable Trust does not save estate taxes at the time of your death. It is a common misconception that if assets are transferred into a Revocable Trust, those assets will escape federal and state estate taxes. Both the Internal Revenue Code and state laws provide that if you transfer assets into a trust and retain a lifetime interest in those assets, they will be included in your taxable estate. There are ways to avoid and minimize estate taxes that we can describe for you. However, it is important that you understand that the mere creation of a Revocable Trust will not result in any estate tax savings.

The Revocable Trust will not be subject to any income tax. All income earned on assets in the Revocable Trust will be included on your personal income tax return. If you act as one of the trustees of your Revocable Trust, it will not even be necessary for the trust to file its own income tax return.

WHAT ARE THE ADVANTAGES OF A REVOCABLE TRUST?

The advantages of a Revocable Trust are:

  °       In the event of your incapacity or incompetency, the trustee is empowered to pay your bills and to manage your assets. This feature avoids the necessity of a court appointed guardian for your estate.

  °       Any assets in a Revocable Trust at the time of your death can be disposed of as you direct in the Revocable Trust without the necessity of a proceeding in probate court. There are several advantages that flow from not having a probate proceeding: First, if all of your assets are in a Revocable Trust when you die, the necessity of making a public record of what you owned is usually avoided. Second, some legal costs may be reduced if there is not a probate proceeding. However, the costs of conducting an Informal probate administration in most states when all members of the family are on friendly terms do not add greatly to the cost of administering a decedent's estate. We generally advise clients that the reduction of probate costs alone is not significant enough to justify creating a Revocable Trust, unless they own out of state real estate.

WHAT ARE THE DISADVANTAGES OF A REVOCABLE TRUST?

The disadvantages of a Revocable Trust are:

  °        The transfer of assets into the names of trustees can be time consuming and difficult if you own a variety of assets.

  °       Dealing with assets once they are in the Revocable Trust can be complicated if transfer agents and others require the signatures of all of the trustees or if they want to review a copy of the Revocable Trust agreement.

IF YOU HAVE A REVOCABLE TRUST, DO YOU ALSO NEED A WILL?