Key Takeaways
- Transferring property into a revocable trust can help you avoid certain probate issues involving out of state property.
- Shifting assets into a revocable trust won’t save estate taxes, but it will provide the opportunity for a basis step-up, helping minimize potential capital gains taxes.
- Revocable trusts provide opportunities for increased privacy and help clients avoid the expense and publicity of a public probate process.
A revocable living trust is a type of trust that can be amended, modified, or canceled (i.e., revoked) at any time, provided that the grantor (individual who created the trust) has the capacity and is making the voluntary decision to change the terms. Additionally, the grantor of the trust is generally both the trustee and the beneficiary (allowing for control of the trust’s assets throughout the grantor’s lifetime).
A revocable living trust can be a powerful estate planning tool.
With a revocable living trust, assets can be distributed to the grantor, and upon death, a “successor trustee” distributes the remaining assets in accordance with the trust’s provisions.
Advantages of a Revocable Living Trust
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Probate can be avoided.
Upon death, assets held in the revocable trust bypass probate. This means the assets can pass to heirs without involving the courts in the probate process, which can be time-consuming and expensive. Upon appointment and acceptance, a successor trustee generally takes over the responsibility of administering the trust without court oversight.
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“Ancillary” probate in another state can also be avoided.
Probate is generally required in each state where the decedent owned property. Moving property into a revocable trust (by recording the deed and transferring the property into the trust) can avoid the necessity for ancillary probate for the out-of-state property.
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Privacy can be maximized.
Because the assets in a revocable trust avoid probate, the trust’s income and assets are not a matter of public record and, in general, need only be disclosed to the trust’s beneficiaries and federal and state taxing authorities.
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Protection in case of incapacitation.
In the event of incapacitation, a successor trustee can take charge without court involvement or approval. The successor trustee has a fiduciary responsibility to manage trust assets for the grantor’s benefit.
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Long-term control of assets.
Similar to a will, a revocable living trust can provide long-term safeguards and standards for overseeing assets and distributions, thereby ensuring the grantor’s intentions are met and the trust’s assets are accessible to future beneficiaries. The grantor also retains the flexibility to incentivize or discourage certain behaviors among successor beneficiaries and implement measures to shield trust assets from creditors and spendthrift behavior.
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Potential basis step-up in trust assets.
Generally, assets held inside of a revocable trust at the time of the grantor’s death are entitled to a new tax basis equal to fair market value on the grantor’s death. This provides the opportunity for a basis “step-up,” which can significantly reduce capital gain taxes incurred if beneficiaries later sell the inherited assets.
Disadvantages of a Revocable Living Trust
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There are no immediate tax benefits.
Shifting assets into a revocable trust won’t save income or estate taxes. Assets in a revocable trust are included in the grantor’s gross estate for federal estate tax purposes.
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Asset protection is not included.
While assets placed in an irrevocable trust typically remain protected from the creditors of both the grantor and beneficiaries, the same cannot be said for assets held in a revocable trust. If asset protection is important, an irrevocable trust, limited liability company, or a family limited partnership could be a better choice. Furthermore, the grantor may wish to explore one of the jurisdictions that have enacted “domestic asset protection trust” rules.
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Additional administrative work.
After creating a revocable trust, assets must be retitled into the trust’s name. Assets not formally held in the trust generally must go through a probate process and would not be under the management of a successor trustee in case of incapacity. But certain types of assets and arrangements can still avoid probate, like retirement plans, insurance policies, annuities, jointly held property, and transfer on death deeds (in some jurisdictions known as “beneficiary deeds”), meaning a revocable trust may not always be needed.
Is a Revocable Living Trust Right for You?
The governing provisions controlling revocable trusts and other types of trusts can vary depending on the relevant state and the specific terms of the trust. Individuals are encouraged to work with an advisor before deciding whether a revocable trust is the right choice.
The tax professionals within Eide Bailly’s Wealth Transition Services team are well-versed in the tax ramifications of trust planning and accustomed to working with a client’s legal counsel to implement tax-efficient estate planning with revocable living trusts.
Fundamental Questions About Estate Planning
