by Paul N. Frimmer
Estate Planning Attorney
Member Emeritus, National Board of Trustees,
The Leukemia & Lymphoma Society
The revocable trust (sometimes called a "living trust") has received a great deal of attention in recent years. The trust has been "marketed" by attorneys, accountants, financial planners, and others involved with the estate planning process as the solution to various estate planning issues. The purposes of this article are to explain the use of the revocable trust in estate planning, and to analyze its benefits and detriments.
A. What is a Trust?
A trust is an arrangement between the person who creates the trust (the "grantor" or "trustor" or "settlor") and the person who manages the trust property (the "trustee") for the benefit of one or more individuals (the "beneficiaries"). In the case of a revocable trust, the grantor usually is the trustee and the sole beneficiary during his or her lifetime. Thus, the grantor transfers property to himself or herself as trustee, for the benefit of himself or herself as beneficiary.
The grantor may revoke or amend the trust at any time, the grantor may distribute any portion of the trust property to himself or herself as he or she deems appropriate, and generally he or she may deal with the property in the trust as if the trust did not exist. The revocable trust often is referred to as a "will substitute," because like a will, it is changeable until death, and it provides for what happens to your property after your death in the same manner as a will.
B. Avoiding Probate
A commonly referred to benefit of placing your property in a revocable trust is that you will "avoid probate." Avoiding probate may or may not be an appropriate goal, depending upon the jurisdiction in which you reside and your particular circumstances. The two most often given reasons for avoiding probate are to save probate costs and to avoid delay.
1. Probate Costs
Generally, probate costs consist of a small court filing fee, attorneys' fees and executors' commissions. An executor (sometimes called a "personal representative") is the person you name in your will to gather your assets together, pay your debts and taxes after death, and distribute the remaining assets to those beneficiaries designated in your will. The executors' commission for these services varies from state to state, and in some states, it is dependent upon the value of the estate rather than upon how much work the executor needs to do.
While a revocable trust may reduce the commissions in a particular estate, the amount of the reduction may not be significant, and the reduction of the commissions is only one factor to consider when choosing between a revocable trust and a will. If you name your spouse, children or other relatives as executors, it is unlikely that they will take a commission for acting, especially if these individuals are the primary beneficiaries of the estate. If you name someone else as executor, a commission probably will be charged, but the same individual or institution acting as the trustee of a revocable trust also will charge a fee for administering the trust.
If an attorney is necessary to sort out the various legal problems that may arise after death, file the appropriate tax returns, and prepare the documents to transfer title to your assets to the beneficiaries, similar services will be necessary whether the attorney is the attorney for the executor under a will or for the trustee under a trust. Depending on how complex and difficult a particular jurisdiction's probate procedure is, the services required of an attorney may be significantly greater under a will than under a trust. However, most states are simplifying their probate procedures, and very few additional services may be necessary.
The fees of the attorney for the trustee of a revocable trust usually are based on the attorney's hourly rate, although in some states, the fees also are based on the value of the estate. However, in most jurisdictions, attorney's fees are negotiable, and you should be able to retain a competent attorney for a reasonable fee irrespective of whether you use a will or revocable trust.
To summarize, a revocable trust does avoid "probate fees and costs," but similar fees and costs are incurred in administering the revocable trust after death. The appropriate question, therefore, is what is the difference between the fees and costs. In many states, the difference may not be significant enough to justify the use of a revocable trust unless there are other good reasons.
2. Avoiding Delay
Administering your property after death in a court supervised probate proceeding is usually more time consuming than administering the property in a revocable trust. Generally, the additional time is minimal and does not hinder the proper management of the property. Many states have adopted streamlined probate procedures, and it is no longer the rule that your property "will be tied up in probate forever." A knowledgeable professional should be able to explain the probate system so that you can determine whether any additional delay caused by the judicial supervision will be detrimental to your beneficiaries.
C. Saving Taxes
Another common theme in the marketing of revocable trusts is that a revocable trust "saves taxes." This statement is a half-truth because the revocable trust in and of itself does not save any taxes:
1. During Lifetime
During your lifetime, all income and deductions from the property held in a revocable trust are reported on your individual income tax return. It is not necessary to file an income tax return for the trust, nor is it necessary to obtain a separate taxpayer identification number. You will continue to use your Social Security number on all bank accounts, stocks, etc. Whatever rules apply to the taxability of income and the deductibility of deductions continue to apply to the taxability of income and the deductibility of deductions continue to apply irrespective of the fact that your property is held in a revocable trust.
2. After Death
Upon your death, the revocable trust may save taxes, but the same taxes can be saved by using a properly drawn will. The terms of the trust (or the will), rather than the fact that the trust exists, determine what taxes are saved. After death, there are two categories of taxes to consider: death taxes (estate taxes, inheritance taxes, etc.) and income taxes:
(a) Whatever death taxes can be saved by utilizing a revocable trust can be saved by utilizing a will. There is no advantage to using a revocable trust over a will for death tax purposes.
(b) A revocable trust can be slightly more expensive for income tax purposes after death than a will, but for most individuals, the income tax consequences of using a revocable trust are identical to the income tax consequences of using a will if both are properly prepared and administered after death.
D. Privacy
A revocable trust provides a certain degree of privacy, both as to the nature and value of your property and its disposition. After your death, a will must be filed with the local probate court (sometimes called an "orphans'" or a "surrogate's" court). In addition, many states require the filing of an inventory of your assets with the court. Both the will and the inventory are open to public inspection. Generally, neither the revocable trust nor an inventory of assets have to be filed with the court or with any other public agency. However, in some states, the revocable trust must be recorded in the county in which real property is located if the trust will operate to transfer real property. Recording the trust makes it a public document.
E. Creditors' Rights
1. During Lifetime
A person cannot create a trust for himself and protect the property in the trust from claims of his creditors. Therefore, the property in your revocable trust will be subject to the claims of your creditors during your lifetime as if the trust did not exist.
2. After Death
A disadvantage of using a revocable trust in some states is that the assets of a revocable trust are subject to the claims of your creditors after your death for the same period of time as the assets would have been subject to the claims if you had not died. In contrast, many states' probate systems have a claim period under which creditors who do not file a claim within a certain period after your death may not have their claims paid. Thus, once the claim period passes, creditors who did not file timely claims with your executor or with the court may be barred from collecting on their claims. Some states now provide the same creditor protection for a revocable trust after death as is provided for a will. Therefore, there is no difference between using a will and a revocable trust for creditor claim protection after death.
F. Assets in Several States
If you have assets in several states or foreign countries, a revocable trust will avoid probate administration in each jurisdiction in which assets are located. Some states do not permit non-residents to be executors, and many states impose the requirement that a bond be posted for a non-resident executor. No such restrictions apply to trustees of revocable trusts. By placing out-of-state assets in a revocable trust, you can avoid these restrictions and expense, and the person who you want to administer your property can do so in all jurisdictions as trustee of the revocable trust.
G. Incompetence
Another benefit of a revocable trust is that it avoids the need for an appointment of a guardian or conservator of your property if you become incompetent. Usually, guardianship and conservatorship proceedings are expensive, time-consuming, and very restrictive. If all of your property is held in a revocable trust, the trust can and should provide that if you become incompetent, you cease to act as a trustee, and a successor trustee is appointed. The transition from you as trustee to your successor as trustee is easily handled without having to involve the local court.
Although the revocable trust does avoid the necessity to appoint a guardian or conservator of your property if you become incompetent, a durable power of attorney will accomplish the same result with a minimum of cost. A power of attorney gives someone you designate the power to deal with your property. Historically, these powers became void if you became incompetent. Now, under the laws of all states, you may sign a power of attorney that is "durable" - that is, it remains valid after your incompetence (but not after your death). Using this power, your designee can manage your property in the same manner as the successor trustee of a revocable trust.
H. Annoyance Factor
Depending upon the types of assets you own, the frequency with which you buy and sell assets, and the sophistication of the business community in which you live, the revocable trust may be difficult to live with during your lifetime. Each time you purchase or sell an asset, you may be asked for a copy of the trust, you may be asked for an opinion of an attorney that you have the power as trustee to carry out a particular transaction, you may have to record the trust with the county recorder of the county in which your real estate is located (thus losing some of the privacy that the trust provides), or you may have to amend the trust to satisfy the requirements of a financial institution, title company, or other entity involved with a particular transaction. The financial community in general is becoming more familiar with revocable trusts, and there are fewer annoyances now than in the past.
While most of these occurrences are inconvenient, they are not serious impediments to using a revocable trust. However, if the other benefits of the revocable trust are not significant in your situation, these potential annoyances may be a sufficient reason not to use a revocable trust.
I. Costs
The creation of a revocable trust and its accompanying documents usually is more expensive than the preparation of a will alone. In addition to the trust, it is necessary to have a simple will which "pours-over" assets not held in the trust to the trust so that all of your assets will be managed in one place. To avoid "probate," all of your assets must be transferred to the trust during your lifetime. Depending on the complexity of your assets, the transfers may require additional legal fees, brokerage commissions or fees, recording or other transfer taxes and fees, and other costs. Most of these costs are not necessary with a will, at least not until after your death.
J. Summary
As you can see, whether or not to utilize a revocable trust should be a decision made after reviewing the benefits and the detriments in light of your state's laws and the relevant tax laws. This article has highlighted the most often given reasons for using or not using a revocable trust, but there are other reasons which may apply to particular situations. You should not assume that a revocable trust is better than a will, or that a will is better than a revocable trust. You should consult a qualified professional to determine which is better for you, and not succumb to the marketing efforts which are designed to make you believe that the revocable trust is a panacea for all estate planning issues.
About The Author  Paul N. Frimmer is a partner in the Los Angeles and Newport Beach, CA offices of the law firm of Irell & Manella, LLP. The head of the firm's Personal Planning workgroup, Mr. Frimmer specializes in estate planning, wills and trust, probate and trust administration, postmortem tax planning, probate litigation, charitable giving, and tax issues relating to these matters.
Mr. Frimmer is also a member of the firm's art law workgroup, specializing in the estate planning aspects of owning art collections, and has authored or coauthored more than 50 publications on estate planning and related areas. He earned his law degree, cum laude, from Fordham University Law School. He is admitted to practice in California and New York and is a California Certified Specialist in Probate, Estate Planning, and Trust Law. He is also a fellow of the American College of Trust and Estate Counsel and the International Academy of Probate and Trust Law. Mr. Frimmer has been an active volunteer for The Leukemia & Lymphoma Society for the past 30 years, has served as a member of its National Board of Trustees and has chaired its Planned Giving Subcommittee. |
If you would like more information, please call Mary-Gail Smith, National Director of Planned Giving, at (888) 773-9958.
Special Note: This article was current with tax law when it was posted August 2003. Congress periodically considers legislaton that could bring substantial changes to gift and estate tax law. Such provisions are typically phased in over a multi-year period. As you consider your plans, please check with your advisors for the latest provisions.
Read earlier articles in this series:
| Click here for your free gift and to get more information about The Leukemia & Lymphoma Society's Estate Planning program. |
print page
email page
