What Revocable Trusts Can, and Cannot, Do For Your Estate Plan

Although your Last Will and Testament will likely serve as the foundation of your estate plan, a comprehensive estate plan should include far more than just a Will. A well thought out estate plan can help you achieve a wide range of goals and objectives by incorporating the right estate planning tools and strategies. While no two estate plans are identical, there are some commonly utilized tools and strategies, such as a trust agreement. Though once used almost exclusively by wealthy families as a way to control the family wealth for many generations to come, trusts have evolved to the point where they are now commonly found in the average person’s estate plan. Though there are numerous specialty trusts used to accomplish specific goals, all trusts are first divided into two broad categories – testamentary and inter vivos (living) trusts. Living trusts are then further divided into revocable and irrevocable trusts. Knowing what revocable trusts can, and cannot, do for your estate plan may help you decide if a revocable trust is right for your plan.

Trust Basics

All trusts are first classified as either a testamentary trust or an inter vivos (more commonly referred to as “living”) trust. A testamentary trust is a trust that does not take effect and become active until the death of the “Settlor.” The Settlor, also referred to as the “Grantor” or “Trustor” is the person who creates the trust. A living trust, on the other hand, takes effect as soon as all of the formalities of creation are satisfied.

Trusts are then classified as either revocable or irrevocable. A testamentary trust is always a revocable trust because it does not activate until the death of the Settlor, meaning the Settlor can always revoke it up to the point of death. A living trust, however, can be either revocable or irrevocable. A revocable trust can be modified, amended, or revoked by the Settlor at any time and for any reason whereas an irrevocable living trust cannot be modified, amended, or revoked for any reason by the Settlor once the trust takes effect.

What Can A Revocable Trust Do for Your Estate Plan?

A revocable trust can accomplish a number of important estate planning goals, including, but not limited to, the following common uses:

• Parents with minor children – a minor child cannot inherit directly from a parent’s estate. With this in mind, parents with minor children often choose to create a testamentary trust that can manage and protect assets until the child reaches the age of majority. The trust can provide for the child in the meantime while guarding the remaining assets until the child is old enough to receive a lump sum disbursement.

• Incapacity planning – a revocable living trust is a popular incapacity planning tool. You, as the Settlor, name yourself as the Trustee and name a spouse, or other trusted individual, as the successor Trustee. All major assets are then transferred into the trust. As the Trustee of the trust you maintain control of the trust assets unless you become incapacitated at which point the successor Trustee takes over automatically without the need to petition a court.

• Probate avoidance – probate can be a lengthy, and costly process that ties up estate assets and may leave beneficiaries without sufficient assets immediately following your death. Trust assets, however, avoid probate, saving time and money as well as making assets immediately available to beneficiaries.

What Revocable Trust Cannot Do for Your Estate Plan?

One of the biggest legal differences between a revocable trust and an irrevocable trust is the status of assets transferred into the trust. Because a Settlor may still control assets transferred into a revocable trust those assets are still considered part of his/her estate. Assets transferred into an irrevocable trust, however, are no longer within the Settlor’s reach. The law, therefore, considers assets transferred into an irremovable trust to be trust assets once transferred. This leads to what a revocable trust cannot do for your estate plan:

• Asset protection — only assets transferred into an irrevocable living trust are safe from creditors because you are no longer the legal owner of the assets once transferred into the trust.

• Tax benefits – certain irrevocable trusts provide tax advantages that a revocable trust cannot provide.

• Medicaid planning/Special Needs planning – a revocable trust cannot help with specialized estate planning goals such as Medicaid planning or Special Needs planning.

Contact Us

If you have additional questions about revocable trusts in the State of North Carolina please join us for an upcoming seminar or contact the experienced estate planning attorneys at Kulas Law Group, P.A. by calling 772-398-0720 to schedule an appointment.