A Revocable Trust in Estate Planning

As discussed in the blog post from last week, a revocable trust is an optional addition to an estate plan. A revocable trust is a legal entity that you create and transfer assets into during your lifetime. During your lifetime, the assets in this type of trust can be fully used, sold, given away, or invested just as if you still owned them individually, but upon your death (or the death of both spouses if it is a martial revocable trust), the Trust becomes irrevocable, and the assets are distributed or managed pursuant to the instructions you have written into the Trust document.

There are many other types of trusts, most of which are irrevocable and serve very different tax and liability protection purposes, but a revocable trust is primarily limited to the following main benefits:

1.          Probate Avoidance

The first primary benefit for most people is to avoid the probate process. Probate is simply the legal process by which the Probate Court oversees the distribution of the assets of a person after that person has died. A typical probate will cost the estate at least $2,000 and can go up significantly depending on the nature of the estate and the time needed by an attorney to aid the executor of the estate. The probate process usually lasts about a year before assets are free to be distributed. In New Hampshire, there are very few ways to get an expedited and less expensive probate, and having a small estate is not one of those ways. A husband and wife can create a joint trust to own all of their property and thereby avoid the potential for two probates.

Anything owned in a trust is not part of a person’s estate when they die, and thus does not become part of the probate estate. There are other types of asset ownership setups that avoid probate as well, such as pay-on-death beneficiary accounts and joint ownership with rights of survivorship. The problem is that there is almost always some property that is part of the probate estate, especially once both spouses have passed away.

2.          Asset Management and Control

With a trust you have much more flexibility and options when it comes to how assets are to be held or distributed after your death. This is especially useful if minor children are beneficiaries because it allows for the trustee responsible for the financial provision to be separate from the guardian of the children, if desired, and it gives you more control over how resources would be used for the care of your children than if the children were just named as the beneficiary under your will. Distributions can be spread out over many years, held until a certain age, and really customized in many ways to suit your goals and desires.

Weighed against these benefits of setting up a revocable trust is the upfront cost to draft it and the administrative work needed to fully implement it (transferring real property deeds into the trust, retitling vehicles or other titled assets, changing ownership or beneficiary designations of accounts to the trust, etc.). The costs and time needed is not significant, but it is a factor for some that is not needed when only a will governs the distribution of assets. Generally, the financial cost to set up a trust is cheaper than the cost to handle the probate of an estate, but the cost to setup a trust is incurred during your life, whereas the cost of a probate is not incurred until after your death.

Ultimately, it is necessary for you to be comfortable with what a trust is and how it would function. If trusts are implemented without being understood or fully funded, they can end up being more of a nuisance than a benefit. However, when properly implemented, they can save time and money and make the transfer of assets upon your death go much more smoothly for your heirs.