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What are some of the considerations in determining whether to estate plan with a Will Plan or a Revocable Trust Plan?

Posted by Neil Thompson | Apr 21, 2021 | 0 Comments

Revocable trusts are an “inter vivos” trust, created during a grantor's lifetime. Revocable trusts allow for the management of property both during life and after death. Revocable trusts are one tool for estate planning, but they are not for every situation. Ultimately, the decision to adopt a will or a revocable trust depends on the client's goals, personal situation, and comfort level.  There are generally no tax advantages to a revocable trust. Because the grantor still has full control over all trust property, any income from the trust property is taxed to the grantor in the same manner as if it were owned outright. However, revocable trusts can include the same types of post-death tax-planning provisions as a will, such as special provisions for married couples, trusts for children and grandchildren, charitable gifts, etc.

There are at least three primary reasons why people create revocable trusts:
1. To avoid probate;

2. To plan for incapacity and not just death; and/or

3. To handle out-of-state real estate.

1) Avoid Probate
When someone dies, a probate proceeding is usually required for transfers of probate property. In general, probate property is property in the decedent's name alone, with no joint owner and no beneficiary designation. If the grantor makes a revocable trust the owner of all probate property, the trustees can distribute the trust property at the grantor's death as the trust terms dictate, without the need for a probate proceeding.  While in many cases probate is not very complicated and can often be done through the mail, there are certain basic procedures that must be followed. And probate is a public proceeding—the probate documents on file with the court, including the will, the inventory of assets, and information about heirs and beneficiaries are subject to public inspection.  With a revocable trust there are generally no court filings. Revocable trust administration is typically private, open only to those with a need to know.

2) Plan for Incapacity
The grantor may serve as trustee of a revocable trust as long as the grantor is able to do so. But the grantor should also designate someone in the trust document to step in and manage trust property in the event the grantor is no longer able. While a power of attorney also gives a named agent the ability to manage property if the principal is incapacitated, the power of attorney ends at the death of the principal. The trustee of a revocable trust continues to have the authority to manage trust assets even after death, which likely makes for very seamless transition in administering the estate.

3) Avoid Out-of-State Probate for Real Estate
In general, property is subject to probate in the state in which the owner lives at death. However, real estate is subject to probate in the state in which it is located. If a client owns real property in another state and dies, there may be a need for two probate proceedings, a Minnesota probate to transfer Minnesota property and an out of state probate to transfer the out-of-state real estate. Making a revocable trust the owner of out-of-state real estate can avoid probate in any state.  There are other ways to transfer real estate at death without a probate proceeding, such as joint tenancy with right of survivorship, a life estate/remainder interest in the property, or a transfer on death deed to children or others (TODD). But making someone a co-owner of property with joint tenancy or life estate/remainder reduces the client's ability to control the property. A transfer on death deed to children may create complications if multiple individuals are beneficiaries. A trustee of a revocable trust can manage the sale and/or distribution of property and pay trust expenses without the need to obtain permission from others. A TODD can be used to transfer the client's real estate to the trust, avoiding the need for a change in ownership during the client's lifetime.

Disadvantages of a Revocable Trust
Revocable trusts are not for all clients. In general, revocable trusts are more expensive to have drafted than a will, primarily because of the increased complexity and need to fund the trust once it has been signed. If a client has significant value in assets not ideal for trust ownership, such as stock options, investment real estate, or closely held stock subject to transfer restrictions, the revocable trust may not be the best approach because probate may be required for them. It may not save substantial time and/or cost to use a revocable trust if there will be a probate in addition to administering the revocable trust assets.  In addition, the client must keep the trust funded over the client's lifetime as the client divests himself or herself of assets and acquires new assets. Some clients may not understand or wish to devote time and attention to such details.

About the Author

Neil Thompson

Neil Thompson - The Prescription for Your Legal Problems in Minnesota


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