What is a Revocable Trust?

At its most basic level, a Revocable Trust is an agreement that directs the management of the assets owned by the trust during lifetime, in the event of disability, and upon death. During lifetime, the trust creator (we will say ‘you’ or ‘your’ here) will transfer all assets into the name of the revocable trust, or name the trust as beneficiary on most or all accounts. The trust is almost ‘invisible’ during lifetime; the income is still reported and taxed to your social security number, just as before. You may buy and sell assets freely and spend as much money as you want, just as before.

However, a Revocable Trust has some very significant advantages, particularly at disability and after death:

DISABILITY – an easy transition. The successor trustee you have appointed, simply takes over to manage the assets for your benefit during any period of disability.

ESTATE TAX PLANNING - While assets in a revocable trust are considered part of the ‘gross estate’ of the trust creator for estate tax purposes, a properly drafted trust, will minimize estate tax for married couples by fully utilizing exemption amounts of both spouses by using credit shelter or disclaimer trust provisions.

The idea is to fully utilize the estate tax exemption amount for both spouses, by having some assets pass to a Trust upon the first death, rather than having all the assets pass to the surviving spouse, and being left with only one exemption amount to use.

Example: Joe and Mary have $6 million between them, and each owns $3 million in his/her respective Revocable Trust. Their Trust provisions allow for the funding of a Disclaimer Trust if the surviving spouse wishes to utilize it. Let’s say Joe dies. Under the terms of his Trust, his $3 million will pass to Mary. But Mary may not want to take all of it because then she will have $6 million in her trust, and everything over $3 million (in 2020) will be subject to Minnesota estate tax.

Mary may disclaim the $3 million so that it passes to a Disclaimer Trust. She must do this within 9 months of Joe’s death, she can’t have accepted any of the assets she is disclaiming, and the disclaimer must be in writing. Once the assets are properly disclaimed, Mary will receive all the income from that disclaimer trust, and she may access the principal if she needs it for her health, education, support or maintenance. Upon Mary’s death, the assets in the disclaimer trust and the assets in her trust pass down to the children per the terms of the trusts.

AVOID PROBATE – this is an important reason people use Revocable Trusts. Probate is avoided because at death, there are no assets in the decedent’s name, so there is nothing to probate. All assets are owned by the trust, and simply pass according to the trust terms. This has several advantages:

Cost Savings – Typically saves thousands of dollars, and a lot of headache for the family

Privacy – no publication of assets, and no court supervision of the asset distribution (note: sometimes it is desirable to have court supervision, so probate might be the right choice for some people)

Asset Control - Assets go to whom you wish, when you want them to pass. For example, you might say you want 1/3 of the assets to pass to the children upon death, ½ of what remains 5 years later, and the balance 5 years after that. Or you may select ages for distribution, such as 25, 30, and 35. There are many options here, depending on your assets and your wishes. Trusts may address specific concerns.

Consult with your Estate Planning attorney for more complete information on these and other strategies. This information is not intended to be complete, so do not make decisions based on this article without having your attorney evaluate your specific situation.

Contact us today if you have questions about this topic or if we can assist you with your Estate Planning needs.

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