In the past, when estate planners suggested the use of revocable trusts, they usually cited one overriding reason: It would minimize probate or perhaps even avoid it.
Revocable trusts are still valuable, but the reasons for using them are now much more varied, and the details are much more complicated.
The traditional approach was to create a tool to minimize or even avoid probate. The concept is simple. Create a trust which is a legal contract. Typically this would be a contract between yourself as the settlor creating the trust, and yourself as the trustee who manages the trust. Transfer assets to the trust so the trust, not you, owns them. Sign a will that pours any assets you did not transfer to the trust while you are alive into the trust on your death. Voilà, you have avoided the need to probate your will.
A cottage industry arose to encourage the use of revocable trusts. To fuel growth, many advisors stoked fears of the average consumer as to the costs, delays and even evils of the probate process.
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But probate avoidance is only one application of a revocable trust, and there are many far more important uses that have not been widely addressed. Advisors can have a highly positive impact on their clients’ planning by encouraging a more robust application of the revocable trust. Here are some eventualities that such a trust can help a client endure.
AFTERMATH OF DIVORCE
Just as a parent might wish that a son or daughter had a prenuptial agreement in case of an ultimate divorce, a modern revocable trust can help protect a child or eventual heir from losing family assets in a divorce.
Under the laws of many states, assets your client inherited or received as a gift are not deemed marital assets for purposes of equitable distribution. A risk to those separate assets is that, if they are commingled with marital assets, they might lose their favored status.
The solution is to have the client set up a separate revocable trust to which he or she transfers all gifted or inherited assets that should be immune from a future divorce.
Segregating those assets into a revocable trust lowers the risk of commingling those assets with other marital assets.
CHANGING A LEGAL LOCATION
If a client bequeaths assets to a surviving spouse or other heirs in a trust formed under the client’s will, that trust, called a testamentary trust, will depend on the local probate court for its existence. This local court is instrumental in forming the trust.
This fact may make it more difficult to escape taxation in that state, or to move the trust to another jurisdiction with laws that are more favorable. For example, the laws of Nevada may be more favorable to protect trust assets from creditors than the laws of the state where the client lives.
If the client dies and their will creates a trust for the beneficiary, it may be difficult to move the trust out of the state in which the client was living when he or she passed away.
Instead, if the trust for the heirs is formed under a revocable trust, no action of the local court is required, and moving the trust may prove easier.
With clients and heirs so mobile nowadays, using a revocable trust in providing for heirs can be advantageous.
SERVING DISABLED LOVED ONES
If a client has a special-needs child, it is a fairly common practice to create a special or supplemental needs trust under the client’s will to protect assets bequeathed to that child. This permits the client to assist the child without undermining his or her qualifications for governmental benefits.
Similarly, if a client is a caregiver to an ill spouse or perhaps an adult incapacitated child, what happens if the client becomes ill? A revocable trust with proper tailoring can provide a mechanism to fill this dangerous gap in many client estate plans.
If the client herself becomes incapacitated, a successor trustee can step in to assist the client or the special-needs child or ill spouse.
The revocable trust itself could contain special-needs language to permit the financing of care during the client’s incapacity, not just after death.
Successor trustees could be selected to provide this care, or hire people to provide it to both the client and the special-needs relative.
MINIMIZING IDENTITY THEFT
Identity theft has become rampant. One reason is that Social Security numbers are used far too frequently for a range of purposes, such as identifying medical records.
If clients set up a modern revocable trust, that arrangement should be funded with assets that are appropriate. Retirement plans and professional practices are assets that should not be transferred to the trust.
If a modern funded revocable trust operates under its own tax identification number and not the settlor’s Social Security number, that trust may not be breached if the client’s Social Security number is compromised.
This may provide a nest egg of assets to tide the client over while he or she is sorting out the identity theft issue.
PROTECTING AGING CLIENTS
Perhaps the most important objective in using the modern revocable trust is to protect aging or infirm clients.
Traditional revocable trusts tended to focus on planning for death. But nowadays, some clients who retire at age 65 will live for three decades after retirement. Some of those years, especially the later ones, may be marked by health challenges.
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Traditional planning simply does not provide enough protection for dealing with these issues. Consider that nearly half of all people who are 85 or older have some cognitive impairment, according to the Alzheimer’s Association. Traditional estate planning deals with this very difficult situation by having the client sign a durable power
of attorney.
A more farsighted approach is to create and fund a modern revocable trust. Having many or most assets in the trust will minimize the delays and risks of passing the baton as the client’s health fades.
Successor trustees can be named to take over the client’s financial affairs to provide protection, but there is more. A revocable trust can also permit a co-trustee to be named to work with the client while he or she can still handle some financial affairs. This can keep the client in control longer, but safer.
Checks and balances can be built into the modern revocable trust. For example, co-trustees can be named. A second fiduciary, a trust protector, can be also appointed. While this person does not serve as trustee, she can monitor the trustee or trustees and have the power to remove and replace them.
A care manager provision can also be included. This could mandate that the trustee have an independent care manager evaluate the client quarterly (or at any appropriate interval) and issue a report to the trust protector, trustee and perhaps even children.
Further, a CPA can be engaged to keep monthly books for the client, thereby providing yet another safeguard.
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