Should You Use a Revocable Trust (Instead of a Will) to Pass Property to Your Heirs?

Mark J. Chamberlain, JD, CPA

Senior Vice President, Wealth Management Group

A revocable trust, also referred to as a living trust, is an instrument used to manage your assets during your lifetime and at death. You are both the creator and the beneficiary of the trust (during your lifetime) and you are often the initial trustee, although Trust Point, in its role as a professional corporate fiduciary, also acts as an initial trustee. A revocable trust may be amended or revoked. And as with a traditional will, you provide for the disposition of your assets at your death, either outright to your beneficiaries or in the trust for their benefit.

The use of revocable trusts has gained popularity as an alternative to traditional wills for a number of reasons. The most significant is that when assets are properly titled in the name of the trust, they are not subject to probate at your death. This can save a great deal of time and expense, since the formal probate process can be long and costly.

The trust continues after your death, which allows the trustee to accomplish the efficient administration of your intent as stated in your trust document. Trust Point often serves as a successor trustee because we are a professional corporate fiduciary with broad administrative and investment experience.

A revocable trust is especially useful if you own real estate in multiple states. By titling the real estate in the trust, you can avoid ancillary probate procedures affecting domestic property held outside your state of residency.

Another reason for the increasing use of revocable trusts is that they protect privacy. Probate files are a matter of public record, while the assets in a revocable trust are distributed without the need for any type of court approval. Revocable trusts also eliminate the need for a court-appointed guardian, should you become incapacitated.

The use of a revocable trust does not create any adverse consequences with regard to income taxes, estate taxes, or gift taxes. Likewise, there are no tax penalties for amending or completely revoking the trust. However, a revocable trust does not automatically create any income, estate or gift tax savings, either.

A revocable trust is typically paired with a pour-over will. This is a will that passes property not previously retitled at the time of your death into your revocable trust. Be aware that you may have to probate the assets passed into your trust by the pour-over will.

Revocable trusts are most often used by individuals. They sometimes are suitable for married couples, in the form of joint trusts, depending on state laws and circumstances.

In order to make a revocable trust work as you intend, it is imperative to properly retitle assets and coordinate beneficiary designations. Because the major benefit of establishing a revocable trust is to avoid probate, you must be sure to retitle the appropriate assets in the name of the trust. These assets typically include real estate, bank accounts, investment accounts, stocks, bonds, and closely held business interests. Many clients open an account with Trust Point as a way to re-title their investment assets.

Also remember to coordinate beneficiary designations with your overall estate plan. Non-probate assets—such as qualified retirement plans, IRAs, and life insurance—pass on to your heirs by beneficiary designations. It is important to coordinate the primary and secondary beneficiaries you name with the disposition you create in your revocable trust. This is also true if you use a traditional will.

Another item to review is the transfer-on-death or pay-on-death designations on your bank and investment accounts. If you do not remove these designations, they will control the disposition of those accounts. While the assets would avoid probate, you might not get the result you tried to achieve with the dispositive provisions of your revocable trust (or traditional will).