Trust in the Trust: Revocable Trusts as a Tool for Estate Planning

Many people have heard of a trust, but don’t fully understand what it is or how it works as an estate planning tool. In its most basic terms, a trust is a legal entity used to hold property or funds for the benefit of one or more people. A trust must name individuals for three different roles:

Grantor/Settlor: The creator of the trust. The Grantor generally has property of some sort (e.g., a home, bank account, business interests) he or she wishes to eventually be transferred to someone else, such as the Grantor’s children.

Trustee: The Trustee acts as a sort of manager of the property the Grantor puts into the trust. The Trustee has a duty to maintain and distribute the property in the trust according to the guidelines and direction provided by the Grantor in the trust document.

Beneficiaries: The Beneficiaries are the individuals who ultimately receive funds or property from the trust, and the trust is created for their benefit.

There are many forms of trusts, used for various purposes, but the most common form is a revocable trust. For a revocable trust, the Grantor, Trustee, and Beneficiary are typically all the same person during the Grantor’s lifetime. This allows the Grantor to maintain control over the property and manage it in whatever way he or she wishes. After the Grantor’s death, a successor Trustee will take over and will distribute the property in the revocable trust to the Beneficiaries.

To demonstrate how this can work: a married couple creates a revocable trust and titles their home in the name of the trust. They are the Grantors, Trustees, and Beneficiaries during their lifetime. The couple names their children as secondary Beneficiaries and successor Trustees. When the last of the married couple dies, their children become Trustees and sell the home, distributing the proceeds to themselves as the Beneficiaries.

Avoiding Probate

In the above example, the children avoid having to open probate proceedings to get the house transferred from their parents to themselves (learn more about what probate proceedings entail here). Instead, the children are able to step in as successor trustees and sell the house as quickly as they would like. Avoiding probate and providing for the seamless transfer of property to beneficiaries are some of the most popular reasons for utilizing a revocable trust as an estate planning tool.

Tax Planning

If the value of all an individual’s property at death – the estate – is under the estate tax exemption amount, it will not be subject to estate tax. This is because each individual has what is called a “unified credit” for federal taxes, which allows them to make lifetime gifts and post-death distributions of their estate tax-free. These lifetime gifts, combined with an individual’s estate, must be under this set unified credit amount (which fluctuates each year) in order to be exempt from taxes. A married couple can combine their unified credits, so that after the first spouse dies, the surviving spouse can retain the deceased spouse’s credit to apply to the surviving spouse’s estate when the surviving spouse dies.

Additionally, revocable trusts can give married couples with high-net-worth flexibility to maximize the unified credit through what is called a “disclaimer” type of trust. A disclaimer trust is a type of revocable trust that allows a surviving spouse to “disclaim” (decline to inherit) a part of the deceased spouse’s estate that the surviving spouse otherwise would have inherited. The goal is for the surviving spouse to reduce the amount they are inheriting so that their own estate still falls within the limits of the unified credit. The disclaimed portion then goes into a separate trust, often called a family share or family trust, and is held for the benefit of the couple’s children or other named beneficiaries until the surviving spouse’s death. The family share or family trust will then not be included in the surviving spouse’s estate.

Complex Assets

Revocable trusts can also be useful when a Grantor has a variety of assets or property that could make transfer to beneficiaries after the Grantor’s death complicated. Multiple homes, rental properties, collector vehicles, or business interests (such as an LLC or partnership) are all examples of property that could be more easily transferred to beneficiaries through a revocable trust.

Complex Distribution Plans

When a Grantor has a large number of beneficiaries or has an elaborate plan for how they want their property to be distributed at their death, a revocable trust can be a useful tool for estate planning. For example, perhaps an uncle would like to leave his home upon his death to his long-term girlfriend to reside in for her life but then would like the home to go to his nieces and nephews. A trust can facilitate this plan by giving specific instructions to the trustee on the girlfriend’s use of the house during her life and its distribution following her death. Without a revocable trust, this plan is more difficult to implement and could require probate proceedings at some point to transfer the home to the children.

Additionally, a revocable trust can continue to exist and hold assets for the benefit of the beneficiaries even after the Grantor(s) have died. The trustee can then make distributions to the beneficiaries over time, rather than the beneficiary receiving a lump sum of money. This can be ideal for young beneficiaries or beneficiaries who have difficulty managing money.

Finding the Best Fit

Despite the usefulness and benefits of a revocable trust, it is not the best fit for every estate plan. If a Grantor has a relatively simple set of assets or property to transfer, a will and some good planning around titling property or naming beneficiaries on accounts would be sufficient. It is important to meet with an attorney to discuss your specific needs and wishes regarding where you would like your property to go after your death. Axley has estate planning attorneys in our Waukesha, Madison, and Janesville offices ready to answer your questions and assist you in preparing for the future.