Trusts created during the grantor’s lifetime can either be revocable or irrevocable. As the name itself implies, a revocable trust can always be revoked or amended by the grantor at any time. Revocable trusts have become a popular estate planning vehicle for avoiding probate.
The Basics
When a person dies, the property they own individually will typically need to go through the probate process, primarily to have a personal representative appointed by a court. The personal representative can then access and administer the decedent’s property before its ultimate distribution. Probate involves filing various documents with a probate court, publishing notices for the benefit of potential creditors, and various other administrative formalities that may prove to be cumbersome and time-consuming.
To avoid probate, a person can transfer all of their property into a revocable trust. Upon their death, there is no individually owned property and no need for a probate administration.
The grantor of a revocable trust typically serves as the initial trustee of the revocable trust. Upon their disability or death, the trust agreement will provide for the appointment of a successor trustee. During the grantor’s lifetime, the assets held in a revocable trust remain under the grantor’s control and are completely available for the grantor’s use and enjoyment. A revocable trust is essentially the alter ego of the grantor during their lifetime.
What Happens Upon Death?
Upon the grantor’s death, the established trust becomes irrevocable and acts essentially as a substitute for a last will and testament. The successor trustee does not need to petition a probate court to gain access to the property held in trust and is free to administer and distribute the trust property according to the terms of the trust agreement without court oversight or involvement.
The use of a revocable trust to avoid probate sounds attractive. When adequately executed, it can minimize the costs and formalities required when administering and distributing a person’s assets following their death.
However, revocable trusts are in many instances over-hyped, misused, and overpriced. There are many circumstances where individuals have entered into revocable trust agreements and have not transferred the ownership of their property into the trust.
When this occurs, it will still be necessary to probate the person’s estate, as their assets will not be subject to the control of the trustee of the revocable trust until they have gone through the probate process and have been administered and transferred into the trust by a court-appointed personal representative.
Trust Issues
The grantor may not understand the importance of transferring the ownership of their property into the trust or may have simply forgotten or overlooked some of their property. Whatever the reason, if a revocable trust is not adequately funded, the primary purpose of the trust, avoiding probate, will be frustrated. Therefore, before entering into a revocable trust agreement, it is essential to understand the costs involved and be prepared to adequately fund the trust so that the overall plan will work properly.
An individual can also create irrevocable trusts during their lifetime. Once executed, an irrevocable trust cannot be revoked or amended. The primary reason a trust will be made irrevocable is to create the completed gift for transfer tax purposes. If the grantor can revoke or amend the trust, a completed gift will not have been accomplished.
When an individual wants to give property to another person during their lifetime but is unsure of that person’s ability to manage the property or desires to protect the gifted property from the person’s creditors, it is advisable to use an irrevocable trust to make the gift as opposed to transferring the property to the person outright.
Some of the more popular types of irrevocable trusts agreements will be discussed in more detail later in these materials.
