Editor’s Note: John R. Sloan is the leader of the Trusts and Estates Practice Group at Ward and Smith, P.A.
Funded revocable trusts can simplify and reduce the cost of managing your assets during your life and distributing them after your death. They can also shield your assets and their value from the public record after death. Experienced estate planning attorneys find, however, that, while many clients have revocable trusts created for them, they do not fund their trusts during their lives. Borrowing from former New York Yankees catcher and manager Yogi Berra, the work necessary to obtain the benefits of a revocable trust “ain’t over” when you execute a properly prepared revocable trust agreement. The transfer of appropriate assets to your trust, called “funding,” is critical to accomplishing your estate planning objectives. This article describes the nature and purpose of a revocable trust, addresses trust funding considerations, and explains the benefits of a funded revocable trust.
What is a Revocable Trust?
A revocable trust is established under the terms of a revocable trust agreement established by you. As the term “revocable” indicates, you, as the “grantor” of the trust agreement, can modify or terminate the agreement at any time during your life. The agreement dictates how your trust should be managed and who should manage it. Typically, the grantor is the initial trustee and beneficiary with complete control and use of the trust assets during the grantor’s life.
In many ways, your revocable trust agreement will be similar to a will. It will set forth your distributive scheme at death, appoint the person responsible for managing and distributing your assets after your death, and contain, if appropriate, estate tax reduction planning. Unlike a will, however, your revocable trust agreement also is designed to hold your assets during your life. This ability to hold assets during your life affords estate planning opportunities for you that your will cannot provide.
Why Fund a Revocable Trust?
If establishing a revocable trust is your game plan, then funding it is the execution. Simply put, the opportunities afforded by a revocable trust cannot be fully achieved unless your trust is funded. Funding your trust literally means transferring appropriate assets to your trust during your life. Essentially, an asset-by-asset review should be performed to determine which assets should be transferred or made payable to your trust and what steps are necessary to complete such changes. The necessary steps then should be completed to ensure that you obtain the full benefit of your revocable trust. Certain kinds of assets that are titled in your name almost always should be re-titled in the name of your trust. For example, your investment advisors should change the paperwork for any of your investment accounts to reflect your trust as the owner. Change of Beneficiary Forms for life insurance, IRAs, and retirement plans should be implemented in the appropriate circumstances to include such assets in your revocable trust’s distribution scheme at your death.
What are the Benefits of a Funded Revocable Trust?
A properly prepared and funded revocable trust can, among other things,
• Avoid the requirement that your estate be probated before the Clerk of Court;
• Reduce the costs of your estate administration, thus preserving more assets for distribution to the beneficiaries of your trust you have selected;
• Protect the identities of your beneficiaries and the nature and value of your assets from disclosure to anyone with the curiosity or motivation to look at the public records that would otherwise be generated by probate of your estate;
• Increase the asset protection available to your beneficiaries for beneficiary-designated assets such as life insurance, IRAs, and retirement plans; and
• Decrease the number of steps necessary to administer your assets following your death.
Each of these benefits is attractive. Together, they are powerful.
First, your funded revocable trust will avoid the necessity of probating your estate. Probate is the process pursuant to which the Clerk of Court oversees the distribution of your assets under your will. If your assets are owned by your revocable trust at your death, then legal title to the assets would be held by your trust, not by you. Therefore, you would not own any assets individually that would be subject to your will. The assets of your funded revocable trust will be distributed to your beneficiaries without court involvement.
Second, the expense of probate will also be avoided. Probate expense arises from two main sources: the probate fee and attorneys’ fees. The probate fee in North Carolina can reach a maximum of $6,000. This fee, however, is not applicable to a funded revocable trust. Moreover, a funded revocable trust avoids the expense of hiring a lawyer to prepare probate-related filings. The total potential savings from your funded revocable trust could be in the $8,000 to $10,000 range, or more.
Third, the beneficiaries and assets (and their values) of your funded revocable are kept confidential. The terms of your will and all of your financial information required for probate after your death become public records upon filing. Anyone can review a probate file. On the other hand, no one other than those selected by you has access to the terms and assets of your funded revocable trust. The value of your closely-held business that may be sold after your death, for example, would not be revealed on the public record if your interests were owned by your revocable trust. If confidentiality is important, then a funded revocable trust is critical to your estate plan.
Finally, avoiding probate reduces the number of steps required to distribute your assets after your death. At a time already made difficult by your death, the reduction of the steps necessary to administer your estate likely would be helpful to the person left with this responsibility.
A revocable trust agreement can be an integral part of your estate plan. While a will is sufficient to distribute certain assets after your death, funding a revocable trust during your life can result in a more efficient, cost-effective, and integrated transfer of your assets.
Executing the trust and transferring assets to it during your life are the keys to obtaining these benefits. When these steps are accomplished, a significant piece of your estate plan will be “over.”
© 2014, Ward and Smith, P.A.
Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. John R. Sloan practices in the Trusts and Estates Practice Group, where he assists clients in the areas of estate planning, estate administration, business succession planning, and asset protection planning. Comments or questions may be sent to email@example.com.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.