Revocable Trusts Offer Flexibility

Investors who are considering a trust face an overwhelming array of choices. Trusts can be established to shield assets from creditors and taxes. They can ensure that property and funds are passed down to the intended people or causes. They can even protect an inheritance from the spendthrift ways of a beneficiary.

Trusts are a key estate planning tool, yet many affluent investors fail to establish them. Only 38 percent of investors with a net worth of $1 million to $5 million have assets held in trust, according to surveys conducted by Spectrem Group in December. Wealthier investors are more likely to have trusts – 55 percent of investors with a net worth between $5 million and $25 million, and 65 percent of investors with a net worth of $25 million or more have assets held in trust. (Spectrem does not include the value of a primary residence when calculating net worth.)

Most trusts types are “irrevocable” and cannot be changed once they are established, but a revocable trusts offer investors the ability to change, distribute and manage their trusts during their lifetime. Though revocable trusts offer many advantages, they may not be the best choice for investors who want to minimize income taxes or may be forced to spend down their wealth to qualify for nursing home benefits.

Aside from retaining control over assets, investors also use revocable trusts to avoid probate proceedings and better protect their privacy. A revocable trust is not considered part of an investor’s estate when he or she dies, so the assets held in trust do not have to go through probate, a potentially long and expensive legal process to settle an estate. Probate is a public process that leaves a will open to scrutiny, but a revocable trust does not need to be filed with the court and remains private.

Revocable trusts can also be used to efficiently transfer control of assets should an investor become unable to manage his or her affairs. A properly worded document can allow a designated person to step in and manage the trust without going to court to obtain legal guardianship.

The flexibility of a revocable trust is both an advantage and disadvantage. Because investors have control over irrevocable trusts and can benefit from them, the IRS considers the trust to be the investors’ property when it comes to tax time. As a result revocable living trusts do not shelter assets from income taxes. The government also considers the assets in a revocable trust to be “countable” when determining eligibility for nursing home benefits. Investors who place their home in a revocable trust may put themselves at a further disadvantage. A primary residence outside the trust would not be counted against eligibility for some forms of public assistance, but a home inside a trust would.

Revocable trusts can be relatively expensive to establish, and must be funded before they can serve their intended purpose. Funding involves renaming accounts and transferring titles to the trust. Investors who fail to complete this process will have set up their trusts in vain. What’s more a revocable living trust does not eliminate the need for a will. Investors typically create a “pour over will” to catch any assets not transferred to the trust, and the will must go through probate.