This trust’s name is a perfect descriptor. Once executed, you can amend or revoke it at any time. On the other hand, you cannot amend or revoke an irrevocable trust under any circumstances. One characteristic that all trusts have is that they are either revocable or irrevocable. If a trust instrument does not provide that it is irrevocable by express terms, then the trust is considered to be revocable.
Many people refer to a revocable trust as a “living trust.” You can choose to revoke the trust instrument at any time and simply revert back to owning the trust assets in your own name and, any assets held in a revocable trust continue to be treated as if they are still owned by you outright. In this way, a revocable trust is not much different than a checking account, in that, you are free to deposit or withdraw money or other property from the trust at any time.
There are a number of misconceptions about the benefits a revocable trust can provide. The most common one involves creditor protection. Placing your assets in a revocable living trust DOES NOT protect those assets from creditors. If you have a judgment against you by a creditor, or if you are going through a divorce, the assets in the RLT will not receive any special protection and will be as accessible as any other assets that you own as an individual in your name.
Establishing a trust-based plan rather than a will-based plan is more labor intensive (both on your side as the client and the attorney’s side as the drafter). As a result, trust-based plans are generally significantly more expensive.
Funding
Once a trust is established, it MUST be funded in order to have a legal existence. You have three choices on how to fund it. You may want to just fund it nominally at first and let it remain dormant until your death when your pour-over will actually “pours” all of your assets into the trust for management and/or distribution.
Your second choice in funding is to selectively fund the trust. You may want to retitle important brokerage or bank accounts in the name of the revocable trust so they will be readily accessible to a successor trustee in the event of your incapacity. If you own real property in areas outside of Texas, it is a good idea to go ahead and title them in the name of the trust in order to avoid an ancillary probate in the other state when you die.
Your third choice is to fully fund the trust at its inception with your assets that can be properly managed in trust. Fully funding the trust is a significant endeavor. You will need to identify all your assets that are held in your name: your home (if you want it in your trust), all other real property, bank accounts, CDs, mineral interests, etc. Once the trust is drafted and executed, you must contact all the holders of these assets, provide them with the Trust Certification, and ask them to retitle everything in the name of the trust. But the work does not stop there. Moving forward, you must remember that anytime you acquire such assets you must insure they are each titled in the name of the trust.
If your purpose for having a trust is to avoid probate, then you will need to fully fund it AND continue to ensure all assets acquired in the future are titled in the name of the trust. If you fail to do that and there are assets outside the trust at your death, the pour-over will must be probated in order to move these “left-out” assets into the trust for distribution.
Advantages of a revocable living trust
First, it is important to note that a RLT is not for everyone and I do not recommend them for everyone. Your specific circumstances dictate whether or not a RLT is advisable. If you lived in California, I could tell you one-hundred per cent that you need a RLT. Probate is a nightmare in California and more expensive than you can imagine. Attorney’s fees are set by statute, and they can be quite sizeable. Additionally, it can take a very long time to finalize a probate in California.
We are so lucky that Texas is a “probate-friendly” state. Texas makes it relatively easy to probate an estate at a fraction of the cost of other states. In addition, if there are no problems, it is possible for a probate to be finalized in 90 days (as opposed years in California).
- Incapacity – Planning for the possibility of incapacity is as equally important as planning for death. The U.S. Census Bureau projects that by 2030 there will be more adults over age 65 than children under age 18! While it is possible people of all ages can experience an accident or illness that leads to their incapacity, those who are older are especially at risk of incapacity. If you have a RLT and become incapacitated, the successor trustee you name in the trust instrument can immediately begin managing the assets held in the RLT. There is no need to retitle assets that are already held in trust, so the transition process is relatively seamless. Utilization of a RLT in this manner may avoid the need for a costly and intrusive guardianship proceeding in the future.
- Durable Power of Attorney – A durable power of attorney has traditionally served a similar purpose in incapacity planning, in that, it provides an agent with authority to manage your assets on your behalf. Prior to 2017, it was commonplace for financial institutions to refuse to accept durable powers of attorney for arbitrary reasons such as the age of the power of attorney or simply because it was not executed on the specific form prescribed by the financial institution. This resulted in agents who held valid durable powers of attorney being powerless to manage the assets of a person who was already incapacitated and incapable of executing a durable power of attorney the institution would accept.
- Fortunately, the State Bar of Texas stepped in and persuaded the Texas Legislature to step in and take action. (You can read more about this in the section Statutory Durable Power of Attorney.) The changes made it much more likely that the institutions would accept the revised power of attorney.
- The disadvantage to using a power of attorney is that there might be a delay between the time the document is presented to the institution and when it is actually approved. This is the result of the statute that grants the third party ten business days to evaluate the document. Most of these financial institutions prefer to work with a trustee under a RLT than an agent under a durable power of attorney.
- Transition - At your death, a RLT has an advantage because immediately upon your death the successor trustee can transition into his role and maintain the current management of the trust. In a will-based plan, the executor does not have authority to handle the assets of the estate until a court hearing in which he or she will be named executor and given Letters Testamentary. These Letters Testamentary are the document that provide the Executor with the authority he needs to proceed. Until receipt of those Letters, he or she has no authority to act regarding the assets.
- Privacy – Once a will is filed for probate, it becomes part of the public record. In an increasing number of Texas counties, probate court records are accessible online, making a decedent’s will readily available for download by virtually anyone with an internet connection. In contrast, a RLT maintains a greater degree of privacy because it does not need to be filed with the court.
- Ancillary Probate – An ancillary (or secondary) probate may be required if you own real property outside of Texas. Titling this real property in the name of the trust will prevent the need for that extra probate process.
- Will Contest – If you are concerned about a potential challenge to your will, a RLT is often a better option. It is much easier to contest a will than to contest a trust. I have recommended trusts for this reason on a number of occasions due to the client’s family dynamics.
