IS YOUR REVOCABLE TRUST WORTH THE PAPER IT IS WRITTEN ON?

Joe has created a revocable trust and he thinks that he has completed everything he needs to do to obtain the benefits of having such a trust. However, if he has not funded his trust (that is, retitled his assets into the trust), his trust document is just a piece of paper. Having it drawn up was a complete waste of time and money.

Before we discuss transferring assets into a revocable trust, let us discuss the purposes of setting up a revocable trust. First, a revocable trust will help you to avoid probate. This could be particularly important to do in the following situations:

  1. You cannot find a person who would inherit from your estate if you did not have a will. When you file a will for probate, the court will require you to notify all your heirs-at-law. If one or more of them cannot be found, this could lead to delay and expense. This is a problem in particular for people who do not have a spouse or children and have not kept up with their relatives from the families of both their mother and father.  However, sometimes parents may not know the whereabouts of an estranged child and this child must be found to probate the parents’ wills.
  2. You are expecting a will contest. This is particularly likely to happen when you are not giving to all your heirs-at-law equally. For instance, you have three children and you are disinheriting one of them. With a will, the child who is not receiving anything receives notice of probate. With the trust, no such notice is necessary. Although there is no guarantee that the disinherited child will not try to contest your estate if you have a trust, having a trust makes it more difficult. The more roadblocks you put in the way, the less likely a contest.
  3. You have property in different states. If you have properties in different states, you will have to probate in every state where you own property. A trust will avoid probate in multiple jurisdictions.
  4. You wish to keep your affairs private. The probate proceeding is open to inspection by the public. A trust can usually be kept private.
  5. You want to ensure that your estate is liquid. When someone dies, the need to pay their bills does not stop. For instance, if they own a house the taxes, insurance and utilities still must be paid. With a will, the executor has to wait until the will is probated before he or she will have access to monies to pay these bills. With the trust, access is immediate.

Financial institutions seem to give more resistance to powers of attorney then they do to trusts. This may be another good reason to have a revocable trust.

A trust has four aspects to it: 1) a grantor (the person who creates and funds the trust); 2) a trustee (the person who manages the trust); 3) beneficiaries; and 4) assets or property. It is the latter aspect that we are concerned about in this article.

Let us say that Joe created a revocable trust. He has the following assets that are just in his personal name:

a savings account;

stocks and bonds;

life insurance;

an IRA.

If Joe were to die tomorrow, would he have to probate? Yes, because he never transferred his savings account, stocks and bonds into his trust, he would have to probate those assets. Hopefully, he has beneficiary designations on his life insurance and IRA, which will directly pass the assets to the beneficiaries and thus, avoid probate.

Should Joe transfer his IRA into his trust? No! IRAs and other qualified retirement plan assets should never be placed into a revocable trust. If Joe transferred his IRA into his trust, all the taxes on the IRA would become due.

How do you change the title on assets to place them in trust? You can do so in two ways:

  1. “John Doe as Trustee of the Mary Jones Living Trust”; or
  2. “Mary Jones Living Trust”

A revocable trust has many advantages. However, you must transfer your assets into the trust for the trust to be effective in managing your assets.