Revocable trusts have long been a mainstay of American estate planning. A trust is relationship between three parties: (i) the settlor who creates and funds the trust, (ii) the trustee who manages the assets held in trust, and (iii) the beneficiary who enjoys the assets. Each of these parties can be a single person or a group of people. Similarly, one individual can hold more than one of these titles at the same time, but a single person cannot hold all titles at once.
What is a Trust?
Clients often ask what the difference is between a trust and a Will. The simple answer is, because a trust is a relationship, it is an intangible thing. It can neither be touched nor measured in objective, real-world units. In contrast, a Will is a document. It is a physical thing that can be felt, carried, and (usually) torn up. While most trusts are described and governed by a physical thing—a document we call a trust instrument—the trust itself remains abstract. Note that most trust instruments can create an unlimited number of separate trusts.
Trusts can be categorized in variety of ways. Here are just a handful of ways that trusts can be classified:
- Revocable or irrevocable;
- Grantor or non-grantor (also called a “true” trust);
- Simple or complex;
- Express or implied;
- Self-settled or third party-settled; and
- Testamentary or inter vivos (established during the grantor’s lifetime).
Revocable trusts are self-settled, revocable, grantor trusts that are express and established during the settlor’s lifetime. (Note that grantor trusts can be neither simple nor complex.) This means they are easier to change than irrevocable trusts. They are taxed to the settlor directly, and they are governed by a written trust instrument that is drafted to be effective during the settlor’s life.
Nearly all revocable trusts have a few standard characteristics. Typically, the settlors will also be a trust’s primary beneficiaries. As such, they typically have expansive rights to demand distributions of trust assets, hire and fire trustees, amend and restate the trust instrument, etc. Revocable trust settlors also typically serve as trustees of their trust. Sometimes, they take on this role exclusively, and other times, they bring additional parties to serve as co-trustees. Finally, when the settlors of a revocable trust die, the trust assets are generally distributed to their descendants or other remainder beneficiaries they might select. In this regard, a revocable trust instrument will be very similar to a Will, and the settlors can choose whether the remaining property will be distributed to the remainder beneficiaries outright or in trust.
Revocable trusts may be deployed for several reasons, but the most common uses are:
- Assisting elderly clients with asset management;
- Holding out-of-state property;
- Probate avoidance;
- Assets management;
- Contest avoidance; and
While revocable trusts have a number of very important uses, some misinformation exists regarding what can and cannot be achieved with a revocable trust. For example, a revocable trust cannot be used for creditor protection in Texas. Additionally, a revocable trust will not offer any tax savings over other estate planning tools.
A trust is only effective over property which has been transferred to it. Thus, to make assets subject to the terms of a trust, the settlor must take the affirmative steps to transfer those assets to the trust. For example, financial accounts must be “replated” to reflect trust ownership. Similarly, interests in closely-held businesses are typically transferred using assignments of interest, and real property is transferred by deed. Settlors often fail to transfer all their assets to their trusts during life. Because of this, “pourover Wills” are often prepared in conjunction with a revocable trust instrument. A pourover Will is a Will, just like any other, except that it distributes estate property to a revocable trust rather than to the heirs directly. As such, a pourover Will pours assets over from the settlor’s estate to the trust. From there, the assets are distributed to the ultimate beneficiaries.
Revocable trusts are a fantastic tool for achieving many goals. They solve an array of real-world problems and make life better for many people. But they can also be overwhelming. To avoid confusion, prospective settlors should seek out quality assistance from competent advisors.
Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP. He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.