Revocable Trusts

Robert Adler is a New York trust and estate lawyer knowledgeable about revocable trusts. He understands that estate planning is an important undertaking for your family.  An important document to consider as part of an estate plan is the Revocable Trust. Sometimes revocable trusts are referred to as living trusts.

Revocable trusts can be used to achieve a variety of goals, including avoiding probate and providing a mechanism to manage your property during your lifetime (which of course is especially important in the event you become incapacitated). Technically, probate means the legal proceeding by which an instrument offered as a property owner’s Last Will and Testament is found, in fact, to be that person’s Will.

Often, certain factors will suggest that a revocable trust not be used for certain of the property owner’s assets. On the other hand, in many cases, it may be appropriate for at least some of an individual’s assets to be held in a revocable trust.

Some General Effects of Avoiding Probate

The probate process often is sought to be avoided because of certain costs and procedures associated with that process. Regardless of whether using a revocable trust will be more cost effective than passing property by Will, avoiding the probate process will bypass certain safeguards built into the law to prevent potential fraud and other adverse effects. For example, the law governing wills requires that instruments can be admitted to probate only if they are executed in accordance with strict formalities. These formalities have been developed to increase the probability that the property will pass in accordance with the actual wishes of the owner. In most cases, those safeguards will not apply with respect to property passing by a revocable trust. Similarly, somewhat stricter court supervision governs the administration of property passing by a Will. Avoiding the probate process means that some level of judicial supervision may not be present.

General Cost Effectiveness of Avoiding Probate

Assets subject to the probate process may be subject to several expenses. These may include the commissions of an executor, attorney’s fees, filing charges, fees of court-appointed appraisers and accountant’s fees. These expenses can vary significantly from estate to estate.

The commissions of the executor can be avoided or reduced by eliminating or reducing the amount which passes by Will. In cases where the amount of property is reduced or eliminated by having it held by a revocable trust, the commissions of the trustee of that trust may be incurred instead of those of the personal representative.

The commissions of the trustee may be as high as or higher than those of the executor but in some cases they may be lower. In any case, a property owner usually may condition someone’s appointment as executor (or trustee) upon that person accepting a lower commission than that provided by law, or no commission at all. If the person accepts the appointment, savings on commissions may be achieved whether a revocable trust or Will is used as the primary instrument to pass assets at death.

A revocable trust may be an especially appropriate vehicle to avoid an anticipated ancillary probate proceeding. (Ancillary probate refers to a probate proceeding that is required in addition to the primary probate proceeding that will take place in the property owner’s home state. For example, ancillary probate will be necessary if the decedent owned real estate located outside of his or her home state.)

In many cases, additional costs may be incurred in creating and funding a revocable trust which would not arise in the estate planning process if a revocable trust were not used. For example, additional legal costs may be incurred in connection with transferring assets to the trust before the property owner’s death.

Confidentiality and Revocable Trusts

Nonetheless, the revocable trust may offer advantages other than the potential costs savings in avoiding the probate process. For example, a property owner’s Will and, in some cases, the assets or the amount it disposes of, may be a matter of public record. Some individuals wish to maintain confidentiality with respect to the nature of dispositions made at death and/or the nature of their assets. A revocable trust is more likely to achieve that confidentiality, although some local courts may require a disclosure of the terms of the revocable trust and the assets it holds. Nonetheless, overall, the probability of the confidentiality being maintained is typically greater with a revocable trust rather than with a Will.

Delays in Administering Property

Delays in having the Will admitted to probate or having the court render decisions necessary to commence or complete certain aspects of the administration of the property passing under the Will may occur. Although these delays are more likely to be avoided by using a revocable trust, the administration of the trust, including distribution of property to beneficiaries, may similarly be delayed.

General Effects of Transferring Assets to a Revocable Trust

As a general rule, no adverse effects occur by the transfer of property to a revocable trust during the owner’s lifetime. However, there may be exceptions that should be considered. For example, a right to purchase property (e.g., a right of first refusal) may arise if assets subject to such rights are transferred to a revocable trust during the owner’s lifetime. This might occur, for example, with respect to interests in a closely-held business where an instrument (e.g., partnership agreement or shareholder’s agreement) provides for the other owners of the business to purchase assets transferred during the owner’s lifetime. Whether such rights will arise depends upon the terms of the agreement.

Similarly, debt on property may become payable upon the transfer to a revocable trust of the assets subject to the debt; certain insurance with respect to property (e.g., title insurance or home owner’s insurance)may be voided by its transfer to a revocable trust; and some adverse tax effects also might occur by transferring the property during the property owner’s lifetime to a revocable trust. Consequently it is always appropriate to consider whether any of these adverse effects will occur, and, if so, to take steps to avoid any which would be regarded as significant.

Revocable Trusts As Lifetime Management Vehicles

At some point in their lives many individuals may experience diminished capacity or incapacity resulting in significant difficultly in managing their financial affairs. This difficulty may be short-term or long-term. Sometimes, a guardian will be appointed in a legal proceeding to take over the management of the assets of a person who becomes incapacitated. However, these proceedings are usually a matter of public record, may cause embarrassment to the individuals involved or may engender litigation among family members for the right to serve as the fiduciary (and thereby control the individual’s wealth). The proceedings can be costly and often may involve the appointment of an attorney as a guardian ad litem for the individual who is the subject of the proceeding.

Generally, these proceedings can be avoided if appropriate action is taken before the difficulty in managing affairs arises. One commonly used method is through the execution of a power of attorney by which an individual or institution is appointed the “agent” or attorney-in-fact and for such power to be “durable,” that is, to continue beyond the property owner’s incapacity. The durable power of attorney can be a very effective and inexpensive tool to implement. However, it is generally very strictly construed under the law and, in practice, attorneys-in-fact experience great difficulty in dealing with third parties on behalf of the principal. This disadvantage of the power of attorney usually can be mitigated by using a revocable trust

A revocable trust may also help to thwart the attempts of individuals to “contest” an individual’s Will. Such “Will contests” typically involve a contention that the document offered for probate is not a valid Will because (a) it was not executed in accordance with the formalities required by law, (b) it was the product of fraud or undue influence, or (c) the decedent did not have the capacity to make a Will at the time it was executed. A revocable trust may eliminate the effective use of some of these arguments. For example, where the property owner has acted as trustee of the trust, it may be more difficult to argue that the entire document is a matter fraud.