Clients are often bewildered by the technical-sounding estate planning tool known as a revocable trust. Almost everyone has heard of such an instrument. In fact, many people have revocable trusts, yet even those who have them often do not understand what they are and/or in which situations it might be beneficial to use them.
Before examining the revocable trust concept in detail, however, it is important to understand what a trust is in general terms. Black's Law Dictionary defines a trust as "a legal entity created by a grantor for the benefit of designated beneficiaries under the laws of the state and the valid trust instrument." It may be helpful to think of a trust in terms of a business, in which there is an owner (the grantor), a president (the trustee), and shareholders (the beneficiaries). In a trust, the trustee carries out his or her duties at the direction of the grantor for the benefit of the beneficiaries. Similar to a business, where an owner can be the president of his or her own company as well as a shareholder, the grantor can also be the trustee of his or her own trust as well as a beneficiary.
The most common trusts utilized in an estate planning context are revocable trusts. Typically, the scenario is the following. An estate planning client desires to provide for his or beneficiaries and wants to avoid probate of his or her estate, but is uncertain as to what assets will remain at death since asset management is ongoing. A revocable trust could greatly assist in this situation.
Our hypothetical client could execute a revocable trust in which he or she, as the trustee (the fiduciary who administers the assets of the trust), makes asset management decisions during his or her lifetime and uses the trust assets for his or her benefit while alive. Upon death, the named successor trustee distributes the trust assets as specifically designated by the deceased client within the trust language. The grantor of the revocable trust can terminate the trust at any time and usually reserves the right to amend the trust.
Thus, a revocable trust is a very flexible document that can be tailored to meet particular circumstances and wishes, while also avoiding an eventual probate. However, just executing a revocable trust is not enough. Too often I encounter estates where the decedent had a revocable trust but never funded the trust. In other words, the individual did not specifically title his or her assets in the name of the trust. If the assets are left in the decedent's individual name, then they must be probated. Titling the assets in the name of the trust simply means that the trust is listed as the owner, not the individual.
Revocable trusts are wonderful estate planning options for those people who understand them and utilize them correctly. In addition to titling assets into the name of a trust, an individual that has executed a revocable trust should also execute a pour-over will to govern any assets that have not been titled into the trust.
An skilled in drafting and administering revocable trusts should be consulted if one is interested in setting up a revocable trust. There are many different factors that should be considered, including tax implications and whether one' homestead property should be titled in the name of the revocable trust.