Revocable Trust

A revocable trust is created when a grantor transfers assets to another person, as trustee, under a written agreement that gives someone, usually the grantor, the power to revoke, alter, or amend the trust. Many states also recognize as valid transfers by a grantor to himself, as Trustee, commonly referred to as a declaration of trust. If the grantor can revoke the trust, he can reclaim the assets free of the trust. A trust created during the lifetime of the grantor is a living (or inter vivos) trust, and the grantor often retains the right to income for his lifetime. When the grantor dies, the trust assets are either distributed to, or held in further trust for, other beneficiaries. A revocable trust that survives the grantor's death can play an important role in the grantor's estate plan, insulating assets from the probate process

The power of revocation may be a limited one. For example, the power may arise only when certain events occur, such as marriages, deaths, or economic changes. The power may also be given to others, so that the grantor is no longer free to amend or revoke the trust. This allows interested parties to get at the trust assets should circumstances change, and provides a degree of flexibility not readily available when irrevocable trusts are involved. Any power concerning revocation that the grantor wishes to retain should be expressly reserved. Such powers are not usually presumed. Generally, powers of revocation that the grantor has retained cease at his death, and the trust becomes irrevocable. However, powers given to others may be made to continue after the grantor's death.

Planning Note

Effect of State Law. The question of the revocability of a trust may be determined by state law. While a power of revocation is usually expressly reserved in the trust instrument if the grantor desires it, state law may presume a power to revoke exists unless there is an express statement of irrevocability. In other states, a spouse may revoke a transfer of community property in trust, if the transfer was made without the spouse's written consent. Often, a grantor's right to deal freely with trust property (i.e., to borrow, purchase, or sell it) is treated as a power to revoke the trust or otherwise revest the assets in himself. State law, or an express restriction in the trust instrument, may limit the grantor sufficiently to avoid his being taxed on the income.

A typical revocable inter vivos trust allows the grantor to retain control over trust assets, and to receive the income from the trust property during his lifetime. Daily management responsibilities are transferred to the trustee. In addition, the grantor can access the trust assets, if necessary in the future, or can make changes in the administration of the trust after he sees how the trust, the trustee, and the beneficiaries function.

A revocable living trust is most appropriately used in conjunction with a will. Even though the grantor may place most of his assets in the trust during his lifetime, there will usually be some property which is not so transferred and which remains part of his probate estate. A will acts as a complement to the trust, pouring over the probate assets into the trust after the grantor's death.

The revocable inter vivos trust can serve an important function in estate planning. One or more of the following advantages may be secured by using the living trust as a device for post-death distributions:

  1. The inter vivos trust can provide relative privacy and efficiency, and prevent inordinate delays in distribution, because of its freedom from the probate court requirements of inventory and accounting.
  2. The administration expenses involved in managing and distributing the trust property may be less than the expenses of probate, especially when children are beneficiaries.
  3. The governing law, especially from the viewpoint of income accumulations, rights of creditors, and the rule against perpetuities, can generally be selected by the grantor.
  4. Ancillary probate proceedings can be avoided if property not situated in the grantor's state of domicile is transferred to a trust rather than remaining a part of the grantor's probate estate.
  5. The living trust frequently minimizes the risk of an attack on the post-death scheme of distribution when the attack is based on a claim of mental incapacity, fraud, or undue influence.
  6. The living trust may set the pattern, during the grantor's lifetime, of management procedures and responsibilities, which continue without interruption after incapacity or death.
  7. The grantor is able to watch how the fiduciaries he has chosen operate and, therefore, to determine whether any changes are necessary.
  8. An inter vivos trust may be coordinated with the grantor's will to provide for pour-overs between the trust and the grantor's estate. Also, the inter vivos trust may be divided into marital and nonmarital trusts at the grantor's death.

Top Reasons to Create a Trust

  1. A trust will protect an inheritance from creditors, bankruptcy, liens, and divorcing spouses.
  2. A trust can help you save money on the estate tax, inheritance tax, generation-skipping transfer tax and gift tax. Hire the right attorney to give you the individual advice and counsel for your assets and situation.
  3. Protect disabled family members or those who may apply for Medicaid soon. A person receiving SSI or Medicaid should receive an inheritance in a "Special Needs Trust" so that she won't be disqualified.
  4. Bypass probate with a living trust a/k/a revocable trust a/k/a management trust a/k/a living revocable trust. It has just as many uses as it does names. This type of trust is called living because it is effective during your life. It is called revocable because you can change it, amend it, or revoke it (terminate it).
  5. A revocable trust is most beneficial for:
    • Someone who owns real property in more than one state;
    • Someone who has children from more than one relationship (step-children);
    • Someone in a relationship who is not planning on marrying; and
    • Someone who doesn't want an inventory of their property filed in the public records.
  6. The reason a revocable trust bypasses probate is because all the property the trust owns does not belong in the probate estate. If you already purchased a trust but have questions regarding the full transfer of your property, we offer Trust Reviews to protect your assets should the worse happen.

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