What is a Revocable Trust

A revocable trust, as can be seen from its name, is a trust whose provisions can be revoked by the grantor (the creator of the trust) at any time before his death. In a revocable trust, the grantor can change the trustee, the beneficiary, or any of the provisions of the trust. This gives the grantor complete control over the properties of the trust. The revocable trust becomes irrevocable when the grantor dies.

If you’re searching to know what a revocable trust is, you’re probably interested in transferring property upon death to avoid probate while retaining control in your lifetime. This is the most common reason for establishing revocable trusts. Revocable trusts are not used to decrease your assets on paper and protect it from creditors, to minimize taxes, or to be eligible for Medicaid.

How is a revocable trust set up

The most common set-up of a revocable trust is the grantor being both the trustee and beneficiary. This allows the grantor to retain control over the property. Yet, even if the grantor is the trustee, in order for the trust to be effective, the grantor still needs to transfer the property from the grantor to grantor, as trustee of the trust.

For example, John executes a revocable trust agreement called XYZ Trust, naming himself as trustee and beneficiary. This is the most common set up of a revocable trust: the grantor, trustee, and beneficiary are one and the same person. In order for this XYZ Trust to be effective, John has to transfer property to the XYZ Trust. So John transfers his house to XYZ Trust. John will deed the house from himself to John, as Trustee of XYZ Trust. This transfer makes it known that John is now holding the house as a trustee and not in his individual capacity.

In order to avoid probate, John will name successor trustees and beneficiaries in case he dies. When John dies, the successor trustee only needs to submit an affidavit and a death certificate to the county records where the property is located in order to transfer the property to the successor trustee. In this way, the house under the revocable trust avoids probate. This makes the revocable trust a suitable alternative to the execution of a will.

If John wants to change the beneficiaries or the trustees or any provision in XYZ Trust during his lifetime, he can. He can also remove assets from the trust and back into his own name. He does this by transferring the house’s title from John, as Trustee of XYZ Trust to John. This is the essence of the revocable trust. It gives the grantor complete control over his property during his lifetime.

What are the setbacks of a revocable trust? It does not allow the grantor to decrease his assets for purposes of minimizing estate tax or becoming eligible for Medicaid. It also does not protect his assets from creditors or Medicaid recovery.

Revocable trust avoids probate

A revocable trust is a flexible trust that provides the grantor with complete control over his properties, and at the same time, makes his properties non-probate assets that can avoid probate upon the grantor’s death.

Because of the flexibility a revocable trust gives the grantor, the properties in the revocable trust are still considered the assets of the grantor. The income from the property is still reported using the grantor’s social security number. Upon death, the revocable trust’s assets are still counted for purposes of payment of the grantor’s estate tax. The trust assets can still be used to pay for the grantor’s debts. One primary benefit of a revocable trust, however, (and this is the reason why many execute it for estate planning purposes) is that the trust assets in a revocable trust avoid probate.

Probate is the court process of admitting the will as authentic and genuine. Because probate is a court process, it generally requires the services of a lawyer. This makes probate a more expensive and longer process than the transfer of assets in a revocable trust. In a revocable trust, when the grantor (who is also the trustee and beneficiary) dies, the successor trustee can simply submit to the county records where the property is located a certified copy of the trustee’s death certificate and an affidavit to immediately transfer the property to the name of the successor trustee. The successor trustee will thereafter manage it for the benefit of the successor beneficiaries. Although there can be some paperwork involved, the transfer of trust assets is generally faster in a revocable trust than through a will.

The costs of setting up a revocable trust, however, are more expensive than a will. It is also more time consuming because of the transfer of properties to the trust. In contrast, a will is a relatively straightforward document providing for the disposition of assets upon death. The trust agreement, on the other hand, provides for trust assets, the powers of the trustee, the designation of trustees and successor trustees and the designation of beneficiaries and successor beneficiaries, to name a few. After the execution of the trust agreement, there is also the additional step of transferring assets to the trust. For these reasons, a revocable trust’s initial costs are more expensive than a will.

Revocable trust allows management of property and not immediate distribution upon death

Another reason a revocable trust is preferred than a will is because it allows the grantor to manage the property after his death rather than make an immediate distribution. In a will, the executor or administrator is tasked to immediately distribute the property after payment of the decedent’s debts. In a trust, when the grantor/trustee/beneficiary dies, the grantor can have a provision in the trust agreement allowing for the management of the assets (for a period of years or even a generation) and the distribution of the income and some principal to the beneficiary, instead of an outright lumpsum distribution. This type of provision is used for beneficiaries who are either disabled, minors or young adults who the grantor might feel are not ready or mature enough to receive a large amount at that time.

Revocable trust does not protect assets from creditors

Does a revocable trust protect my assets from creditors? This is a common misconception about revocable trusts. Only irrevocable trusts can protect assets from creditors. An irrevocable trust agreement, once executed, cannot be amended anymore by the grantor. Once properties are transferred in the name of the irrevocable trust, the grantor cannot take it back anymore. These assets are now administered in favor of the beneficiaries (who cannot be the grantor). The grantor cannot amend the trust without the consent of the beneficiaries. When reporting the trust’s income with the Internal Revenue Service, the trustee will have to get the trust’s own Employer Identification Number. The irrevocable trust will pay its own income taxes. Because of the irrevocability and the difficulty in amending an irrevocable trust, properties in the irrevocable trust are not considered properties of the grantor’s anymore. For this reason, the grantor’s creditors cannot reach the irrevocable trust’s assets anymore. Some examples of irrevocable trusts are Medicaid Asset Protection Trusts and Grantor Retained Annuity Trusts.

In contrast, assets in a revocable trust, whose provisions can easily be amended by the grantor, is considered assets of the grantor’s. The grantor pays for the income tax of the revocable trust and reports it using his own social security number. Because of the flexibility the revocable trust gives the grantor, the assets in a revocable trust are not protected from the grantor’s creditors.

Avoiding taxes in a revocable trust

When a revocable trust is set up to be multi-generational, what a revocable trust can avoid are transfer taxes for the succeeding generations who will be beneficiaries of the trust. In New York, a trust can live for up to 21 years after the death of a beneficiary living at the time the trust is created. For this reason, a trust can span generations and can avoid transfer taxes.

For example, upon the grantor’s death, the grantor appoints a bank as its successor trustee. The bank manages the trust assets for the benefit of the grantor’s successor beneficiaries. When these successor beneficiaries die, there is no need to transfer assets anymore and pay any taxes. The corporate trustee can simply recognize the new successor beneficiaries based on the revocable trust agreement (that has become irrevocable upon the grantor’s death) and immediately manage the trust assets in favor of the successors to the successor beneficiaries. Multi-generational transfer taxes can be avoided in this way.

Revocable trust as a suitable will replacement

People often hear that what a revocable trust is is a suitable will replacement. Although this is correct, a revocable trust can do much more than a will. A revocable trust can provide for management of a person’s assets upon his or her disability. A will or power of attorney cannot be signed anymore once the person is not of sound mind. A revocable trust avoids this problem by creating an agreement that not only provides for management and disposition of a person’s assets upon death, but also includes management of his assets when he becomes disabled or mentally incapacitated. A revocable trust can provide for the appointment of a successor trustee when two physicians of the grantor can issue a certification regarding the mental incapacity of the grantor, and this appointment of a successor trustee can be revoked once the grantor regains mental capacity.

As opposed to a will, a revocable trust can also provide for management of assets for the beneficiaries upon the grantor’s death. A will calls for the immediate distribution of the grantor’s assets upon death and after payment of taxes and debts. In contrast, a revocable trust can provide for management of the trust assets for a number of years. In fact, under New York law, the trust can manage and not distribute the assets for up to 21 years after the death of a beneficiary living at the time the trust is created.

In addition, a revocable trust is a proper alternative in estate planning when the person is uncertain who his beneficiaries will be. The grantor can already establish the trust and make changes to the names of the successor beneficiaries easily in the future by simply executing a trust amendment or trust restatement form.

If you want to know what is a revocable trust, what your options are in planning your estate, if you are considering drafting a will or thinking about executing a trust, we, at the Law Offices of Albert Goodwin, are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].