Tax Law Insights

Is a revocable trust for you? There are a number of factors for you and your attorney to consider. One considerations is the most efficient and cost-effective way to transfer assets at death to your beneficiaries. In many cases, the revocable trust is the most efficient path. A well-drafted revocable trust agreement should provide greater flexibility in carrying out the wishes of the decedent and protecting the interests of the beneficiaries.

The transfer of assets owned by someone at his death occurs through a court-supervised process generally referred to as "probate" or "estate administration." By law, an estate must be opened with the probate court, meaning that the probate court will require that information be provided about the decedent, his assets and liabilities and other matters. This information must be provided in writing to the court on court approved forms. An inventory must be provided of all assets owned by the decedent and frequently written appraisals are also required to determine the value of these assets. A formal accounting must be made of all receipts and disbursements for the estate. In many cases, the approval of the probate court is required before the estate may take actions that affect the assets of the decedent.

In addition to the reporting requirements described above, the estate is also required to pay probate fees and other costs associated with this process. In many cases a fiduciary bond may be required and these bonds can be expensive and difficult to obtain. The entire process can take between eight months to a year to complete and even longer in more complex estates.

The law requires that someone (the personal representative) take personal responsibility to complete these actions. If that personal representative fails to carry out these duties properly, the personal representative can be held individually liable by the beneficiaries and subject to various sanctions imposed by the probate court.

Note: Having a will can significantly reduce the expense and complexity of the probate process but the probate court reporting requirements described above must still be met.

The revocable trust is frequently used in coordination with a will to direct assets to the intended beneficiaries. As explained in our earlier post (Part 1), a revocable trust is a trust where the person who establishes the trust (the settlor) has the right to amend or modify the trust in any way and may withdraw or contribute assets to the trust at any time. Because at death the assets are owned by the revocable trust and not by settlor, these trust assets are not part of the estate of the decedent or subject to the probate process. This will avoid the expense and minimize delays associated with the probate process for the assets held by the revocable trust.

This advantage of a revocable trust becomes apparent if we compare the process of transferring assets at death with a revocable trust versus the probate process discussed above. The valuation of assets and the accounting for the activities of the trust can occur on a more informal and expedited basis. The approval or the probate court is not required to transfer assets to the trust beneficiaries and these assets may be distributed to the beneficiaries as promptly as the trustee considers prudent. Of course, no probate fees or other court costs are incurred either in the revocable trust. This flexibility in the management and distribution of trust assets generally results in a more timely distribution of assets to the beneficiaries at significantly less cost when compared to the probate process.

So there are are clear advantages to use a revocable trust to transfer of assets at death as compared to the probate process. To realize these advantages, the trust agreement must be prepared to provide the trustee the discretion and latitude. Assets must also be owned by the trust (titled to it) and not owned by the decedent. Also, one should consider whether the more intense oversight of the probate court provided by the probate process is appropriate for a particular set of facts.

In summary, the revocable trust is often used in coordination with your a will to direct your assets to the intended beneficiaries but may also minimize the expense and delays associated with the probate process. A revocable trust does not change the disposition of your estate but in many cases is a more efficient path to achieve those goals.