In order to avoid unnecessary fees, confusion, and stress for your fiduciaries, family, and friends, we urge you to consider forming and funding a revocable trust. Many of us know that it’s important to have a will to outline how our assets should pass in the event of death. A more modern estate plan typically incorporates a “pour-over will” and a revocable trust. An appropriately drafted and funded revocable trust can minimize probate court involvement (and cost) and expediate estate management and closure.

What is a revocable trust?

A revocable trust, also known as a living trust, is a trust that can be changed or terminated by you, the grantor (also known as the creator of the trust), at any time as long as you are not incapacitated. A revocable trust is frequently used in conjunction with a will to memorialize your estate plan. The trust is generally used to avoid probate, simplify asset management, and increase privacy.

Why today?

What would happen if you were unable to run your business, communicate your values, or even revise your will due to hospitalization or death? If your wishes are only outlined in a will, your family would need to go to court in order to manage your affairs. If you have an appropriately drafted power of attorney as well as a revocable trust, the management of your assets during life and following your death can be greatly simplified in the following ways:

Avoid probate proceedings. If you only have a will, your family, friends, and fiduciaries must rely on an efficient, operational probate system to manage your assets and achieve closure with respect to your estate. Today, many courts are overburdened and understaffed. In some cases, even acquiring a death certificate can involve a herculean effort, which is the last thing we want to require of our loved ones, especially while they are in mourning. Instead, if your assets are owned by a revocable trust, your trustee can continue to manage those assets even after your death, efficiently and with minimal court involvement.

Avoid guardianship and capacity proceedings. Not only does a revocable trust provide for the passing of assets upon death, but it can also provide for management of your assets during temporary or even long-term periods of incapacity. Typically, a revocable trust names the grantor as initial trustee and beneficiary. The trust can also provide for a co-trustee and/or a successor trustee to be authorized to transact on behalf of the trust at a time that you determine. This minimizes the need for court proceedings and appointment of a guardian to manage your assets in the event you become unable to manage your own affairs.

Important complementary documents like durable powers of attorney and healthcare proxies should be executed in addition to, and not instead of, revocable trusts. Durable powers and co-trustees are especially helpful in the gray area between capacity and incapacity.

Increased privacy. In many states, a will is filed in court, making it a public document. If instead you have a short will that says you give all your assets to a trust and a separate document (the revocable trust agreement) containing the estate plan’s details, your plan can remain private. This is helpful because people who are not beneficiaries (for example, an ex-spouse) will be unable to see your whole plan.

Limited ongoing court involvement. When trusts are created in a will, some are surprised to learn that the court remains involved in ongoing matters well after the estate is considered closed. For instance, a “testamentary trust” (a trust formed under a will) may require the court to approve things you might not expect. For example, the friend you name as trustee of the testamentary trust may not be able to resign or to appoint a successor without court approval.

If you have named trusted advisors as fiduciaries, including family and friends, it could simplify matters and minimize court and legal fees if they can act as a team rather than seeking court approval for actions on which they all agree. In many states, a revocable trust agreement can allow this.  

The benefits of limiting court involvement may seem intuitive, but during the COVID-19 pandemic, those advantages played out in real time. In 2020, courts limited activity to only the most pressing cases given lack of staff as well as significantly increased demand. In most states, the management of assets during incapacity and/or distribution of assets following death was not considered a matter that rose to the top of the court’s list of priorities. This meant that for clients who were temporarily disabled during the pandemic, or who sadly passed away in 2020, families who did not have powers of attorney and funded revocable trusts were at the whim of the courts when it came to management and movement of assets. Families who had a clear succession of trustees outlined in a properly drafted and funded revocable trust could continue to manage assets without disruption.

Ease of changing the plan. Wills are more difficult to update than trusts. There are significant signing formalities required to create or modify a will, while an amendment to a revocable trust is fairly simple to execute. If you sign a will providing that at your death the assets pass to a revocable trust, you can just update the trust when you want to make changes. Amending or revoking a trust involves fewer formalities than signing a new will.

Lower fees. There may be some additional legal expense in drafting a revocable trust to accompany your will, but in some cases, this expense is recovered when your estate is administered because the trust typically simplifies administration, reducing overall fees.

The revocable trust is tax agnostic. Moving your assets to a revocable trust does not change the tax treatment of those assets. You are still taxed on the trust’s income, and the trust’s assets will be subject to transfer tax at your death. The trust uses your Social Security number, so tax reporting typically is not complicated by the creation of a revocable trust. Creating the trust alone will not save estate tax; however, your situation may lend itself to incorporating estate tax savings techniques into the trust.

If you have any questions about creating a revocable trust, please reach out to your Brown Brothers Harriman relationship team.