Tax Law Insights

One of the issues attorneys assess in evaluating an appropriate estate plan for a client is whether a revocable trust, also known as a living trust, is the best vehicle for implementing the client's wishes. The revocable trust is frequently used with a Last Will and Testament to direct assets to intended beneficiaries but may also minimize the expense and delays of the probate process. A revocable trust does not change the disposition of the estate, but in many cases the trust is a more efficient path to achieve the transfer of assets.

As with all legal issues, many factors play a role in this analysis but over the next few posts, we'll address factors McNair attorneys consider in evaluating whether a revocable trust should be used as part of a client's estate plan. For context, we'll first review the basics of revocable trusts and how they work.

First, a trust is an arrangement where one person (the trustee) holds legal title and control for the benefit of some other person (the beneficiary). The person who establishes the trust and provides the initial funding of the trust is known as the settlor. It is possible for the same individual to serve as both the settlor and trustee and to also be one of the trust beneficiaries. If a settlor also wishes to be a beneficiary, the trust must have at least one additional beneficiary other than the settlor. This requirement is typically not difficult to satisfy as the living trust is frequently used as a will substitute so that upon the death of the settlor the assets in the trust are distributed to persons other than the settlor.

A trust may be "irrevocable" meaning that once the trust is established the settlor of the trust has no power to change the terms of the trust. Alternatively, a trust may be "revocable" meaning the settlor can amend or modify the trust in any way, at any time, and withdraw or contribute assets at any time. In this manner a revocable trust functions much like a will in that until death or disability of the settlor, the trust can be changed, amended, or revoked at any time. Keep in mind, however, that if you become incapacitated, the trust will likely become irrevocable because the settlor would not have the legal capacity required to revoke or otherwise amend the trust.

Although it is possible to create a trust without a written instrument, this is not common or is it prudent. Any trust should be established by a writing that sets forth the name(s) of the settlor, the trustee (and the trustee's responsibilities), the beneficiaries, and states other key provisions of the trust. This writing is referred to as the trust agreement.

An example may be useful to see how a trust works: John (the settlor) signs a trust agreement also naming himself as the trustee and funds the trust with a $100. In the trust agreement, John is the initial trustee and during his lifetime John will also be the sole beneficiary of the trust. However, upon John's death, the remaining trust assets will be distributed to his son, Jake. The trust is revocable as John may terminate the trust, change the trustee, change the beneficiary, or, for that matter, terminate the trust. Upon John's death, the trust's assets will be distributed to Jake under the terms of the trust.

Although the revocable trust is very flexible and a useful tool, there are many other factors to consider such as who shall serve as the successor trustee, when is it appropriate to fund the trust, and does the additional expense associated with the trust justify the investment. The settlor's age, marital status, tax situation and other matters can also affect this analysis.