Overview of the Revocable Trust
A Revocable Trust (or “RT”) is the front-line estate planning recommendation for a client who wishes to avoid a court probate of estate assets and to minimize court guardianship concerns in the event of mental incapacity.
An RT that is “funded” will avoid a court probate at death. The probate avoidance feature of the RT is thought by most to be the RT’s the most valuable benefit. Probate is the court-supervised process of transferring a deceased person’s assets to the heirs identified in the Will. Avoiding probate is appealing because probate is a relatively expensive, time-consuming and inconvenient process.
If the client (or “settlor”) becomes mentally incapacitated, then his or her designee steps in as trustee of the RT. Often the designee is the spouse or the “lead” child. Importantly, RT owned assets (versus assets owned in one’s name) are not subject to court guardianship.
Also, at the time of mental incapacity, the settlor’s pre-selected designee then becomes the trustee and continues to invest and manage the RT assets as provided in the RT. This affords a smooth transition of investment control and positions the successor trustee to pay for the settlor’s support and health care costs for life.
Parties to the Trust
With most RTs, the person who creates the RT (the “settlor”) also will be named as the initial trustee. Further, the settlor is often the sole beneficiary of the RT for life. Importantly, all RTs provide that the settlor may amend the RT at any time. Then, upon the settlor’s death, the RT becomes irrevocable – just like a Will does – and the designated successor trustee takes office.
As with a Will, the successor trustee of the RT has responsibility to pay all costs and debts and then disburse the RT assets to the heirs identified in the RT.
Funding the Trust
For the RT to actually eliminate probate and reduce guardianship concerns, all assets which would otherwise be subject to probate must be re-titled (or “funded”) to the RT. Assets not owned by the RT usually will be subject to probate. Thus, a crucial element of fully implementing one’s RT is the follow-up work of transferring asset ownership to the RT.
Funding the RT means transferring legal title of each applicable asset to the RT. For example, if John Smith is funding his RT, he will change legal title of his bank account from his individual name to “John Smith, Trustee, John Smith Revocable Trust dated 1/1/2019.”
Unique considerations pertain to certain types of assets, such as life insurance, IRAs and homestead property. Thus, it is necessary to consult your RT attorney to develop an appropriate “funding plan” before transferring assets to your RT.
Estate and Income Taxes
The RT does not reduce estate taxes unless it contains appropriate tax reduction provisions. Estate taxes can also be reduced by a properly drawn Will. However, due to the current $11.18 million federal estate tax exemption, estate taxes reduction is not a concern to most.
During the settlor’s life, the RT does not alter the income tax situation. For income tax purposes, all income and loss associated with RT assets are reported on the settlor’s personal tax return.
Although many believe RTs shield assets from creditors, this is not correct. However, other estate planning devices exist which do provide creditor protection.
The RT is the estate planning device of choice by most and should be considered by those who wish to avoid probate and to reduce guardianship concerns should mental incapacity occur.
Plan for Your Future
The Law Office of Robert H. Eardley, P.A. was founded to provide a broad spectrum of personalized trusts and estates legal counsel to the greater Southwest Florida community. Our legal team has decades of experience as well as the highest professional ratings to bring you comprehensive legal services tailored to meet your unique needs. Contact our Naples office today.
Robert H. Eardley, Esq., is Board Certified by the Florida Bar as a Wills, Trusts and Estates specialist, holds a Master of Laws (LL.M.) degree in Estate Planning, and practices law in Naples. He may be reached by telephone at (239) 591-6776 or by visiting the firm’s website at www.swflorida-law.com/contact.