What is a Revocable Trust and why do I need one?

I am often asked by new clients whether a Revocable Trust is necessary. I answer that I honestly cannot remember when I last drafted a comprehensive estate plan that did not include a Revocable Trust. Almost all attorneys who specialize in Trusts and Estates will include a Revocable Trust as part of a comprehensive estate plan. There are many reasons why. Some of the most important reasons include: enhanced incapacity planning, probate avoidance, and privacy.

Incapacity Planning

The first purpose of a Revocable Trust is to provide a vehicle for the management of one’s assets in the event of incapacity. A Durable Power of Attorney is a very useful document to address incapacity on a short-term basis; however Durable Powers of Attorney have certain limitations. Many banks and financial institutions are hesitant to enforce Powers of Attorney that are over five years old. This issue does not exist with a Revocable Trust. In the event of incapacity, assets transferred to a Trust can be managed by the non-incapacitated Trustee. This avoids the expense and complication of having to petition the Probate Court for appointment of a Conservator in the event of incapacity and provides a comprehensive and long-term solution to incapacity.

Revocable Trusts and Probate Avoidance

Revocable Trusts also serve a useful purpose if one wishes to accomplish before death some of the work that is otherwise accomplished after death as part of the estate settlement process. By transferring assets to a Revocable Trust before death, one avoids the need for the Executor to transfer these assets into the name of the Estate after death. Although the value of “avoiding probate” often is exaggerated, it may result in a reduction in estate settlement costs. In addition, Estates that avoid probate are often settled more quickly than Estates which require a full probate. As a result there is often a significant savings in Estate settlement legal fees.

A further purpose of establishing a Revocable Trust is to minimize the ongoing costs of administering the trusts for the benefit of family members after death. Trusts established under a Will (referred to as Testamentary Trusts) require the Probate Court to have jurisdiction over the trust for life. Trusts established under a Revocable Trust are not subject to ongoing Probate Court jurisdiction and thus avoid certain potentially costly administrative requirements such as the filing of periodic Probate Court accountings. In contrast, if one were to establish trusts under a Will, then the Trustees of these trusts would be required to expend the time and money necessary to file formal accountings with the Probate Court every three years.

Privacy

Connecticut law requires public probate proceedings for every resident who holds assets of more than $40,000 in their name upon death unless those assets pass by beneficiary designation. Notices are sent by the Probate Court to beneficiaries and legal heirs. The person appointed Executor of the Will must file several reports and an Accounting with Probate Court. All such probate documents are public and part of the public record. When assets are held in a Revocable Trust, at death they pass outside of the Probate Court system and the provisions of the Trust are not part of the public record.

In addition to the three most important advantages of a Revocable Trust here are some other advantages:

• Rapidly accessing assets. Probate can be time-consuming and expensive to complete. With a Revocable Trust, the Trustee can immediately withdraw funds to pay obligations and administrative costs, and to distribute assets to beneficiaries.

• Eliminating Will contests. If one is concerned that their Will may be contested or challenged by a disgruntled heir, a Revocable Trust is a must. Wills are relatively easy to contest in the Connecticut Probate Court system. That is not the case with a Revocable Trust. It is much more difficult for a disgruntled heir to contest a Revocable Trust.

• Negating spousal claims. In Connecticut, a surviving spouse can demand a share of the estate of the spouse who died with a Will. The law provides that surviving spouse is entitled to an income interest in one-third of the value of the property passing under the Will. However, the assets in a Revocable Trust funded while the grantor was alive are exempt from that claim. This can be particularly important in second marriage situations.

Tax, Creditor And Other Consequences

• Transferring assets to one’s Revocable Trust does not shield those assets from one’s creditors during one’s lifetime.

• A Revocable Trust is not an income tax-saving or income tax generating vehicle during one’s lifetime. One must pay the income taxes on all the income that the Trust assets generate. If the trust is properly structured by an experienced attorney, the trust may be sheltered from federal and Connecticut estate taxes upon one’s death.

• One must transfer assets into a Revocable Trust in order to avoid probate at death. At Holland Law Offices, we regularly create Deeds to re-title real estate into a Trust. We also work with financial advisors to help re-title financial assets and accounts into a Trust.

Because of the many considerations in drafting a Revocable Trust, one should consult with an experienced Connecticut Trust and Estate attorney. That person can help you through the decision process and inform you of your choices and their consequences.