A revocable trust is a legal arrangement that allows a person to transfer ownership of assets upon death, while avoiding probate. Some people also establish revocable trusts when they want their property to be managed and not immediately distributed after their death.
A revocable trust is also called a living trust or inter vivos trust. This trust becomes irrevocable upon the grantor’s death.
What Revocable Trusts Cannot Do
Revocable trusts cannot decrease your assets on paper for purposes of asset protection from creditors, minimizing taxes, or Medicaid eligibility. If your goal is to achieve any of the above, your remedy is to establish an irrevocable trust, and not a revocable trust.
How Revocable Trusts are Different from Irrevocable Trusts
By its name itself, a revocable trust is a trust that can be amended, modified, or revoked at any time by the grantor while still alive. Because it can be amended, modified or revoked, a revocable trust is not considered an independent and separate entity from the grantor. Thus, a revocable trust reports its income using the grantor’s social security number.
An irrevocable trust, on the other hand, is considered an entity separate from the grantor. It reports its income independently from the grantor. For this reason, an irrevocable trust requires its own tax identification number (EIN). As a separate entity, an irrevocable trust allows a grantor to transfer property to the trust, decreasing the grantor’s assets on paper, making the grantor asset-eligible for Medicaid and protecting the property transferred to the trust from the grantor’s creditors.
Why Establish a Revocable Trust
Most people establish revocable trusts because they want to avoid probate. In New York, real property cannot be transferred after death without going through the court process of probate, except if the property was under a life estate deed or trust.
Life estate deeds, however, are irrevocable once signed. The grantor loses control over the property in a life estate deed because the property is transferred immediately to the grantee, reserving to the grantor a life estate. Transferring property to a revocable trust, on the other hand, allows the grantor the flexibility to change who he wants the property to be transferred to upon death, with a simple amendment of the trust.
Another reason grantors establish revocable trusts is because they wish to their property to continue being administered even after their death. This is especially true for those grantors whose children cannot administer the property on their own (i.e., spendthrifts, minors or children with disability) or grantors who want their property to be administered for a period of time (i.e., management of trust property until the beneficiary turns 25 or until the happening of an event).
With revocable trusts, trust property can be managed after the grantor’s death, unlike in a probate proceeding where property is immediately distributed to the beneficiaries upon the grantor’s death (after payment of debts).
How a Revocable Trust is 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 full 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, A executes a revocable trust agreement called XYZ Trust, naming himself as trustee and beneficiary. In XYZ Trust, A also names successor trustees and successor beneficiaries who will succeed him when he dies. A can revise the names of the successor trustees and successor beneficiaries before his death by a simple amendment of the trust.
For the trust to be effective, A needs to transfer property to the trust. Because the most common set up of a revocable trust is for the grantor to be both the trustee and beneficiary, A, in this set-up, needs to transfer property to himself as trustee of the XYZ Trust.
For example, in the case of real property, A needs to execute a deed with A as grantor and A, Trustee of the XYZ Trust as grantee. Once recorded, this transfer gives notice to the public that A is holding the real property as trustee and not personally in his individual capacity. When A dies, the successor trustee simply needs to go to the county recorded with the death certificate of A, an affidavit, and a copy of the relevant pages of the trust showing the name of the successor trustee, in order for the real property to be transferred to the successor trustee without probate.
This makes the revocable trust a suitable alternative to the execution of a will. Because the trust is revocable, A can change the names of successor trustees and beneficiaries during his lifetime or even revoke the trust itself, giving A complete control over the property.
Costs of Setting Up a Revocable Trust
Setting up a revocable trust is more expensive than a will.
A will is a simple legal document that needs to be executed in the proper manner. After the execution of the will, no other act is required to make it effective.
The revocable trust, on the other hand, requires the transfer of properties to the trustee after the execution of the trust document. The transfer of properties to the trustee will incur costs, in addition to the drafting and execution of the revocable trust document.
In you compare, however, the costs of a will plus the probate proceedings after your death and the time it takes to transfer property to your designated beneficiaries as opposed to the revocable trust, the transfer of properties to the trustee, and the subsequent transfer of properties to the successor trustee after your death, these costs may even out in the end.
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.
If you want to know what a revocable trust is, 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, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at firstname.lastname@example.org.