Revocable Trusts (also known as Living Trusts)

 

A Revocable Trust is a legal document which allows you to maintain control of your affairs while you are alive and determine the distribution of your estate after death. You can amend, cancel or revoke your Revocable Trust whenever you want.

 

In addition to providing flexibility as a planning tool,  a Revocable Trust will allow for the management of your affairs if you become incapacitated and facilitates the distribution of assets on death without the cost and delay of probate.

 

How Does a Revocable Trust Work?

 

A Revocable Trust is a legal document in which you designate yourself as Trustee and appoint Successor Trustees to manage your affairs in the event of incapacity or death. By designating yourself as the initial Trustee, you are able to maintain complete control of your assets. That control shifts only upon the occurrence of a specific event, such as the determination by your doctor that you no longer are capable of managing your own affairs due to illness or mental incapacity. After death, the assets are distributed to loved ones or held in trust for their benefit, as in the case of minor children and young adults. You can amend, cancel or revoke your Trust whenever you want, but no one else can change it's terms unless you've specifically granted them that power in the trust document.

What Are the Benefits of a Revocable Trust?

Most people think of a Revocable Trust as a means to avoid probate. And, while it's true that a properly-funded Revocable Trust will allow assets to pass to heirs without probate, a Revocable Trust is much more than just a probate avoidance tool. It's all about peace of mind.

 

For parents of minor children, a Revocable Trust is a critical means of assuring that assets (such as life insurance) will be properly managed for the benefit of minor children if both parents become incapacitated or perish in a common accident. For elderly persons, a Revocable Trust provides comfort that assets in the trust will be managed properly by one or more trustees during a period of incapacity. And, everyone who is concerned about preserving their privacy and the privacy of family members should have a Revocable Trust to avoid the publicity of the probate process.

 

A properly drafted Revocable Trust will allow you to:

  • Eliminate probate on your death; 

  • Eliminate guardianship if you become mentally incapacitated; 

  • Name the person you want to control your affairs if you become mentally incapacitated; 

  • Keep your affairs private; and 

  • Provide for children and other loved ones through a flexible planning document that can easily be changed as your family’s circumstances change. 

 

Comparison: Revocable Trust vs. Will

 

Avoiding Probate.  Many folks believe that, if they have a Will, the assets they own at death won't have to be transferred through the probate process. This misconception comes from the mistaken belief that only dying without a Will requires the involvement of the Probate Court, when, in fact, dying with  a Will subjects heirs to the same probate process as dying without a Will (called dying "intestate.")

 

The only difference between dying with a Will and dying intestate is that, in the latter, state law dictates how the assets are distributed to heirs. Unless assets are held jointly or have beneficiary designations associated with them (such as life insurance or IRAs), assets passing by Will must  be transferred through probate. Consequently, a Will requires  probate--it doesn't eliminate it.

Click here for a chart comparing a Revocable Trust and a Will:  

 

Providing For Minor Children and Young Adults.  No  planning vehicle is better than a Revocable Trust for minor children or young adults. Whenever prudent planning calls for assets to be held in trust to assure proper management and distribution of the assets, it is far more efficient and much less costly to establish such trusts for beneficiaries under the terms of a Revocable Trust. Although trusts for beneficiaries can be established by your Personal Representative under a Will, trusts created by Will are 1) subject to the oversight and control of the Probate Court, 2) open to public view, and, 3) are more likely to be challenged by disgruntled family members.

Minimizing Potential Challenges and Claims Against Your Estate.  Assets passing to heirs by Will are more readily subject to the claims of creditors than assets transferred by a Trustee under a Revocable Trust. That's because the probate process is designed to give creditors an opportunity to enter claims against your estate. In fact, probate originated many years ago as a legal procedure established primarily for the purpose of making the assets of a deceased person available to his or her creditors.

 

Any person can file a claim against your estate simply by submitting a claim to the Clerk of Court. Once a claim received, the claimant is entitled to a hearing to determine whether or not the claim must be paid.

 

While the Trustee under a Revocable Trust can be compelled in court proceedings to pay claims of creditors, the court proceedings would have to be initiated (that is, a suit would have to be filed) by the claimant, since nosuch proceedings (probate) is started or necessary with a properly funded Revocable Trust. Therefore, the claimant must assume the burden and cost of initiating the lawsuit. For that reason, it's less likely that a claim will be made against your estate if the assets are held in a Revocable Trust.

 

Planning for Incapacity.  This is where a Revocable Trust is far superior to a Will as an estate plan. If you choose Will planning to transfer assets on death, you need to create a plan for managing assets during a period of incapacity--a critical planning element not covered by a Will. If you choose a Will as the basis for your estate plan, it is very important to give an Agent under a Power of Attorney broad authority to manage your assets in the event of incapacity. Such a broad grant of authority--with no instructions as to how that authority is to be used--can be unsettling, but is a necessary part of the Will planning process.

 

By comparison, a properly drafted Revocable Trust authorizes your Successor Trustee to take charge of your affairs and contains specific instructions as to how assets are to be managed and distributed during a period of incapacity. There is no need to rely on a Power of Attorney to manage your affairs. Under North Carolina law, a Power of Attorney must be made a public record by recording in the Registry of Deeds before the Agent has authority to act. As with the probate process, this leads to public disclosure of private facts--something that most families wish to avoid. There is no requirement that a Revocable Trust be recorded, and that means your

family's affairs remain private.

 

Finally, the authority granted to an Agent under a Power of Attorney is frequently questioned by financial institutions and others, particularly if the Power of Attorney is more than 6 months old (perhaps because the institutions recognize that Powers of Attorney typically are issued as a matter of course and contain no instructions as to80 how the assets are to be managed).

 

By comparison, the authority of a Successor Trustee to manage assets held in the name of a Revocable Trust is rarely questioned (it's never happened in my practice). I attribute this recognition of authority granted to the Successor Trustee of a Revocable Trust to the fact that the creator of the trust has taken the time to consider whom they want to serve as their Successor Trustee, has knowingly given the Successor Trustee control of the assets by transferring them to the Revocable Trust, and, in some cases, has given specific directions to the Successor Trustee for the management and distribution of those assets.

 

Can the Terms of a Revocable Trust Easily Be Changed?  Yes.  As your family situation or financial circumstances change it may be necessary to modify your estate plan.  A properly established Revocable Trust easily can be amended to meet your planning needs. The estate plans that we prepare for our clients are organized in a three-ring notebook to allow for ease of amendment at a relatively low cost.

This website and all materials appearing herein are presented solely for educational purposes and cannot be relied upon by anyone for elder law, estate planning, tax or any other purpose.  You must seek advice from competent legal, financial and tax advisors before attempting any form of elder law planning or any other form of estate planning.  Nothing presented on this website implies or creates an attorney-client relationship between a site visitor and the author, Jay H. Krall.  Attorney Krall is licensed by the North Carolina State Bar and not in any other state.  Links to other internet sites are not endorsements of any products or services described at those sites.   

Circular 230 Disclosure: Pursuant to U.S. Treasury Department Regulations, we are required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

© 2020 Jay H. Krall,  Attorney at Law

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