Transferring Assets at Death: Revocable Living Trusts

Revocable “living” trusts have become a very popular estate planning vehicle, primarily for the purpose of avoiding a probate proceeding at an individual’s death. While revocable trusts can be wonderful tools for estate planning in many situations, they may not be the “cure-all” that some promoters advertise.

What is a Revocable Trust?

Trusts can either be irrevocable — which means they are permanent and normally cannot be amended or revoked (terminated) by the grantor — or revocable, which means they can be amended or revoked (hence the name, “revocable trust”). A revocable trust is a written agreement between the person establishing the trust (the “grantor,” or “settlor”) and the person managing the trust (the “trustee”); in general, the grantor and the trustee are the same person initially. The trust document may provide for:

– The management of the grantor’s assets during the grantor’s lifetime;

– The distribution of assets upon the grantor’s death;

– The continued management of assets for others after the grantor’s death; or

– Any combination of the above.

A revocable trust is sometimes referred to as a “living” trust, or an “inter-vivos” trust (which literally means a trust “between living persons”), because it is created during the grantor’s lifetime.

Generally, you are the trustee of your own revocable trust during your lifetime, although you can name someone else as trustee, if you so choose. As the trustee, you decide how the trust assets are invested and whether to buy and sell assets. Further, since the trust is revocable, you can always amend or revoke it and take back the assets in your own name, if you so choose. You can name a successor trustee in the trust document, which gives that individual the authority to administer and distribute the trust assets at your death, according to the terms you have established in the document.

Revocable Living Trusts and Probate

Assets in a revocable living trust will avoid probate at the death of the grantor, because the successor trustee named in the trust document has immediate legal authority to act on behalf of the trust (the trust doesn’t “die” at the death of the grantor). The successor trustee can pay the debts and taxes of the deceased grantor, and can distribute the trust property directly to the beneficiaries by signing real estate deeds, transferring bank accounts and mutual funds, etc. Since the successor trustee has this legal authority to act at the grantor’s death or incapacity, the probate court does not need to issue an order approving the transfer of the trust property.

To avoid probate, however, your assets generally need to be transferred to your trust while you are living. If you do not transfer your assets to your trust during your lifetime, then they may be subject to probate at your death anyway.

Be careful when it comes to revocable trust seminars and sales pitches stating that “everyone needs a revocable trust.” The need for probate avoidance is often overstated by attorneys and marketers selling revocable living trust packages, particularly for individuals with small estates, or young married couples who are primarily concerned with establishing trusts for their children in the event of their untimely deaths. “One-size-fits-all” is rarely a substitute for personal planning for your particular needs.


Advantages of a Revocable Living Trust

Probate avoidance is the main reason why most people establish a revocable living trust today. Although the costs and length of a probate process depend entirely on the type of assets you own at your death, and the value of those assets, a revocable trust will often simplify administration of those assets, thereby allowing you to save on attorney fees and other costs. Furthermore, since the probate court records are open to the public, a revocable living trust can also provide you with additional privacy. Finally, a trust may also shorten the time period required for distributing the property, without the statutory time periods required under a probate proceeding.

Because the grantor of a revocable trust retains the power to revoke the trust, he or she is treated as the owner of the trust property for state and federal income tax purposes. This means that a separate income tax return is not required for the trust as long as the grantor is also acting as trustee.

Disadvantages of a Revocable Living Trust

For some people, the added complexity of establishing a revocable living trust creates more difficulty than it resolves. Many individuals are impatient with the formalities that accompany the transfer of title of assets to the trust, recordkeeping requirements, monitoring title and other matters. This impatience may result in the revocable trust not being properly funded, which means that the assets outside of the trust may be subject to probate anyway. These “unfunded,” or improperly managed trusts can create many problems at a grantor’s death.

As stated above, you generally need to transfer your assets to the revocable living trust during your lifetime to make sure they avoid probate (Wisconsin is unique in that it does have a procedure for married couples to transfer assets to a trust after the death of one or both spouses). You also need to make sure that assets acquired after the revocable living trust is established are transferred to the trust (or acquired in the name of the trust).

For example, let’s say that you created a revocable living trust years ago. You decide you want to purchase a second home in Arizona. You must title the property in the name of the revocable trust, so that you don’t end up undergoing probate in Arizona to transfer the property to your children or other heirs at your death.

In most cases, a will is still essential, as you cannot be sure that you will transfer all of your assets to the revocable living trust and maintain it over the years in such a way that there will be no probate assets in the estate at your death. This is known as a “pour-over” will, as it pours any probate assets into your revocable living trust.

Finally, the legal cost of preparing an estate plan, with a revocable trust and a pour-over will as the “main vehicles” of the plan, will typically cost more than preparing an equal estate plan with just a will. However, it is assumed that the cost of administering a properly funded revocable trust should be less than the cost of administering an estate in probate under a will.

As you can see, there are many factors to consider when evaluating whether a revocable living trust is right for your estate plan. That’s why it’s crucial to retain the guidance, knowledge and support of a qualified financial advisor and estate planning professional when navigating the decision-making process.

In the meantime, do you need a refresher on the fundamental building blocks of an estate plan? Be sure to read Part I of this article.

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Dean Stange

J.D., CFP® | Principal, Senior Financial Advisor

Dean Stange, J.D., CFP®, is a Principal and Senior Financial Advisor with Wipfli Financial Advisors in Madison, WI. As an attorney, Dean has provided estate and succession planning advice to business owners for more than 20 years. He primarily focuses on the ways in which business ownership, tax and estate issues can impact long-term financial planning.

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Transferring Assets at Death: Revocable Living Trusts

time to read: 5 min