Revocable trusts, sometimes referred to as “living trusts,” can accomplish a lot, and therefore often play a foundational role in estate plans. Assets placed in revocable trusts by-pass the public process of probate, ensuring expedient and private transfer to beneficiaries. Read on to understand what revocable trusts don’t accomplish.
Establishing A Revocable Trust
A big part of the appeal of a revocable trust is that the grantor who creates it retains control of the assets, and can make changes at any time. Establishing a revocable trust does require a good bit of leg work, since arrangements must be made to transfer assets into it: “For instance, you may have to contact various financial institutions, insurance companies and transfer agents to facilitate ownership changes in accounts. You may also have to update beneficiaries, issue new stock certificates, revise business interests, sign and record real estate deeds, and retitle cars and other property.” In addition to assigning assets to the trust, you must name a trustee:
You can name yourself as trustee or choose a professional to handle the job. Regardless of who you choose, be sure to name a successor trustee who can take over the reins when required.If you designate yourself as the trust’s initial beneficiary, you’re entitled to receive income from the trust for your lifetime. You should also designate secondary beneficiaries, such as your spouse and children, who are entitled to receive the remaining assets after the trust terminates.Notably, you still retain some measure of control over the trust during your lifetime. For instance, you may be able to revise certain terms, change beneficiaries or terminate the trust entirely. Thus, the typical living trust is “revocable.” The trust becomes irrevocable upon your death.
Although revocable trusts provide a tremendous amount of flexibility, enable assets to by-pass time-consuming and public probate protocols, and even allow the trustee to designate funds for their own care in the event of declines, there are some potential drawbacks to establishing a revocable trust. It’s always a good idea to work with an estate planning attorney who can take your specific goals and circumstances into consideration. For example, the cons of revocable trusts include:
Revocable trusts don’t offer much protection from creditors. Because you retain ownership rights in the trust property, the assets are exposed to creditor claims, unlike an irrevocable trust….Despite a common misconception, revocable living trusts don’t provide any direct tax benefits. The assets are included in your taxable estate and dispositions of trust property can result in tax liability. You must report the income tax that’s due, including capital gains on sales of assets, on your personal tax return….You can’t rely on a revocable trust to solve all your estate planning problems. Nor should it be viewed as a one-step alternative to having a will. Nevertheless, the pros discussed above may outweigh the cons — and often do — for your personal situation.
Understanding The Difference: Revocable vs Irrevocable Trusts
Much of the appeal of a revocable trust, of course, is that the person establishing it (the grantor) can serve as trustee, and therefore retain control of the assets and make changes to the trust provisions as life takes unforeseen twists and turns. However, the benefits associated with irrevocable trusts are possible, precisely because the grantor relinquishes control of the assets placed in them:
There’s a basic distinction between revocable and irrevocable trusts. With a revocable trust, you retain the right to revise the trust’s terms, including removing or adding beneficiaries and restricting management of the trust assets. This provides you with flexibility even though the assets have been transferred to the trust.An irrevocable trust has the opposite effect. The trust’s terms cannot be changed after the trust has been drafted. However, the assets you transfer to an irrevocable trust are protected from creditors and removed from your taxable estate. Thus, unlike revocable trusts, irrevocable trusts offer tax benefits. Consider the differences and weigh your options.
As with all estate planning decisions, when establishing any type of trust, it is important to think into the future as much as possible. For example, irrevocable trusts can be particularly effective tools for families anticipating the need for public benefits in the face of declining capacity and longer lives. Some estate planners even recommend setting up both revocable and irrevocable trusts to “get the unique advantages of both types of trusts.
Trustees and Trustee Bonds Explained
Keep in mind that every trust needs one or more trustees, and all trustees have fiduciary obligations, meaning they are held to exceptionally high legal standards,“the most important of which are the duties of loyalty and care, and the duty to act in accordance with the terms of the trust agreement.” Given the seriousness of the role, trustee bonds are frequently required. Essentially, a trustee bond is a specific type of fiduciary bond that protects the interests of the trust and its beneficiaries in accordance with applicable laws. As a leading national provider of many types of fiduciary bonds, Colonial Surety makes it easy and efficient to obtain trustee bonds: Just get a quote online, fill out the information, and enter a payment method. Then, simply print or e-file the bond from anywhere.
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