Silver Lining Playbook: Fund a Revocable Trust

BBH Senior Wealth Planner Alison Hutchinson explains why now is the time to fund a revocable trust.

In order to avoid unnecessary fees, confusion and stress for your fiduciaries, family and friends, we urge you to consider funding a revocable trust now. Social distancing is impacting every industry, and our courts are no exception. Court employees deemed “nonessential” are at home, and processing in some counties, especially those that did not have reliable electronic filing systems and procedures prior to the crisis, is limited to emergency filings, with formerly simple requests bridging weeks rather than days. An appropriately drafted and funded revocable trust can avoid the probate court and expediate asset management and closure.

What is a revocable trust?

A revocable trust, also known as a living trust, is a type of trust that can be changed or terminated by you at any time as long as you are not incapacitated. It 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 an extended COVID-19 hospitalization or death?  

Avoid probate proceedings. If you only have a will, your family, friends and fiduciaries must rely on an efficient, operational probate system in order 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 now. If, instead, your assets are owned by a revocable trust, your trustee is able to continue to manage the trust 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, it can provide for management of your assets during temporary or even long-term periods of incapacity. You will likely name yourself as an initial trustee and beneficiary, but the trust can provide for a co-trustee and/or a successor trustee 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 health care 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.

Still not convinced? Benefits transcend COVID-19.

If we agree that courts will function normally again, and that death or incapacity are thankfully unlikely before normal operations resume, a practical response may be to focus on other things, especially if you are not considered high risk. Consider these benefits that transcend COVID-19.

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

Ease of changing the plan. Wills are more difficult to update than trusts. There are significant signing formalities and codicils to wills, 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. Because the trust uses your Social Security number during your life, tax reporting typically is not complicated by the 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.

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