Let’s connect!
CPA Chat T&E Chat
September192022

Should a Revocable Living Trust be Part of Your Estate Plan?

Kevin Wong, CPA, MST, MSA

09.19.22 | T&E Chat

Estate planning can be a complicated matter, with many things to consider during the process. One consideration is the various types of trusts available to the individual. Among these is the revocable living trust. This is often used to complement a will. The assets in the revocable living trust typically don’t have to go through the probate process, which could become costly and time-consuming. A very recent probate case involving the rock star Prince’s estate finally settled after six years.

What is a revocable living trust?

Trusts are either revocable or irrevocable. With an irrevocable trust, the trust terms are set when the trust is created. With limited exceptions, the irrevocable trust can’t be changed, terminated, or expanded. This could deter some individuals as they will not have total control over the trust. This is different with a revocable trust. With a revocable trust, the grantor has control over the trust and has the ability to change the terms of the trust, beneficiaries, substitute assets, and even terminate the trust. During the grantor’s lifetime, the grantor will be able to benefit from the trust income and the right to use the trust assets. After the grantor’s death, the trust assets will be distributed as directed by the trust agreement.

The revocable living trust should not be a replacement for a will. It should be used in conjunction with the will. By transferring the assets into the trust, you are legally changing the ownership of the assets to the trust. These assets now held by the trust will generally not go through the probate process. Even with the living trust in place, it is still critical for you to have a will for any assets not transferred into the trust. You can also include a “pour-over” provision to your will to direct remainder assets to the trust.

Benefits and drawbacks of a revocable living trust

When considering if a living trust is right for you, you should consider the pros and cons afforded by the trust.

The benefits include:

  • Protection from probate. Your estate will not have to go through a costly and time-consuming probate process for the assets transferred into the trust. As the assets don’t go through the probate process, they are not public records.
  • Control during your lifetime. During your lifetime, you can direct the trust the way you want. You can name yourself trustee, add or remove trustees and beneficiaries, and share in the income and use of the trust assets. You may also transfer assets between yourself and the trust with ease. If for any reason, you want to terminate the trust, for example, a falling out with a sibling that you created this trust for, you can choose to do so.
  • Segregation of assets. Spouses can use living trusts to segregate the assets they acquired before marriage from assets acquired during marriage.
  • Minimization of Estate Tax. Provisions can be included in the trust agreement to establish a credit shelter trust to transfer wealth and provide for continuous management of your assets while maximizing estate tax exclusion upon your death. This could provide you with peace of mind that the assets would not be squandered away by your beneficiaries.

Some drawbacks include:

  • No tax benefit. The assets will be includible in your estate as gifts to the living trust during your lifetime and are not considered completed gifts until your death. Additionally, any income earned by the trust is reportable and taxable to you during your lifetime, just as it would be if the assets were titled in your name.
  • Minimal asset protection. If you name yourself as a trustee, this will provide very little asset protection for you from creditors.
  • Administrative expenses. There may be costs involved with transferring assets, as well as professional fees in getting the trust set up and funded.

Conclusion

As you are doing your estate planning, you may want to consider a revocable living trust. It could be a powerful complement to your will while avoiding the costly and time-consuming nature of probate. Discuss with your trusted advisor if a revocable living trust is right for you.

Questions? I can be reached at 212.331.7441 | kewong@berdonllp.com or contact your Berdon advisor.

Kevin Wong is a Senior Manager in the Personal Wealth Services Group of Berdon LLP with nearly 10 years of professional experience. He works closely with high net worth individuals on matters involving their personal income tax, family businesses, and fiduciary, gift and estate taxes.

Back to all CPA Chat Blogs

Share: