Understanding the Revocable Trust

Having a thoughtful estate plan in place ensures that your assets are managed and distributed according to your wishes and can reduce, or even eliminate, federal or state estate taxes. While a revocable trust can be the centerpiece of an overall estate plan, it is unlikely to accomplish everything desired. Knowing what it can and cannot do is critical to achieving goals.

You Are Your Trust

One of the convenient features of a revocable trust is that you and your revocable trust are the same taxpayer during your lifetime. Assets transferred to the trust will continue to be treated as owned by you for tax purposes. While you are alive, you will not need to file a separate tax return for your revocable trust: All income, dividends, gains and losses will be reported on your individual tax return. However, the assets in your revocable trust are still owned by you for liability purposes and are not protected from creditors.

Privacy

For many people, the thought of a relative, friend, neighbor, coworker or stranger knowing what their assets are upon their death, and who inherits those assets, is an unnecessary invasion of privacy. If you do not have a revocable trust, the probate court will oversee the administration of your estate, and information about your assets, transactions and names of your beneficiaries will be available to the public.

However, a revocable trust that is properly funded during life will eliminate this information from being made public. A revocable trust can also be drafted to prevent beneficiaries from knowing what each other receives from the trust after your death. This may eliminate hard feelings if one beneficiary is treated differently.

Funding the Trust

Many of the benefits of having a revocable trust will go unrealized if the trust is not properly funded during life. The way to fund your trust is to change the title of many, if not all, of your assets to your revocable trust, including personal property, cash, real estate and life insurance.

Assuming your revocable trust is properly funded during life, not only will your postdeath goals have a much better chance of being realized, you will also have the added benefit of continuous management of your assets in the event that you become incapacitated.

In addition, because probate will be avoided for most, if not all, of your assets, they will not have to be retitled upon your death (the trust being the owner of your assets before death and continuing to be the owner after death) unless they are to be distributed outright to one or more beneficiaries rather than remaining in trust for their benefit. It is likely the assets of a trust can be distributed or otherwise used for the benefit of the beneficiaries more quickly than if probate is required.

Tangible Personal Property

Personal effects-such as art, jewelry, furniture and clothing-can be transferred to your revocable trust and distributed upon your death pursuant to the terms of your trust.

The alternative is to have these assets distributed by the executor of your estate pursuant to your will, which will require them to go through the probate process.

Cash and Cash Equivalents

Other than certificates of deposit, people generally do not have more than one or two cash accounts, such as a checking or savings account, perhaps combined with a money market account. For these types of accounts, the financial institution where the account is held will be able to assist you in retitling the account in the name of your revocable trust.

The account will continue to have your social security number for tax reporting purposes, but the account number may change depending on the institution. Other than perhaps ordering new checks for your checkbook, there should be no cost associated with making this change. Keep in mind that if you have a joint checking account with a spouse or another person, there may be benefits to leaving it as is for convenience purposes.

Real Estate

For most people, it will make sense to transfer title to their residence to their revocable trust. In NH, you are not required to file a copy of your trust document with the registry of deeds when you transfer title of your home to your revocable trust. However, you will have to file limited information about your trust, such as the name of the trust and trustee.

If the residence is considered your homestead, you need to make sure that you do not inadvertently lose your homestead protection in the process of transferring title. This may be as simple as assuring that the deed is done correctly or requiring the trust to have specific homestead provisions, depending on the state.

Life Insurance Proceeds

If your life insurance is not already owned by an irrevocable life insurance trust (a type of irrevocable trust designed to keep the insurance proceeds from being part of your taxable estate upon your death), then in most situations it makes sense to designate your revocable trust as the beneficiary of the life insurance policies. Doing so can help ensure that you fully use your federal and state estate tax exemptions and Generation Skipping Transfer tax exemption, if needed, and will otherwise allow your successor trustee to manage and distribute your assets according to your wishes.

Retirement Accounts

Retirement accounts are typically the most difficult asset to deal with from a tax-planning perspective. The more you have in retirement assets, the more difficult the decision-making may be. Factors to consider include charitable intent, marital status, other assets, beneficiaries and whether assets are to be distributed outright at your death or remain in trust. Naming your trust as the beneficiary may not be the best option. As with all other decisions to be made in developing an estate plan, consulting with professional advisors, such as an estate planning attorney and accountant, is highly recommended.

Out-of-State Assets

The main point to remember is that if you do not transfer title to real estate that is located in a different state to your revocable trust, or provide for some other means of ownership for the real estate, such as a family limited partnership (FLP) or limited-liability company (LLC), then the real estate will need to be probated in that state upon your death. It is possible to go through the probate process in two or more states if you do not properly plan ahead.

Business Assets

It is important to keep in mind business assets, such as an FLP, LLC or S Corporation, when developing your estate plan, and to consider whether it is appropriate to have your revocable trust be the owner of such assets. Many times, it is more efficient to deal with these assets outside of your revocable trust.

Remember, just because you can transfer an asset to your revocable trust, that doesn't mean that you should. Proper planning in this regard often requires attorneys and accountants working together to integrate your business and estate plans.

Spouses

If you are married and one of your objectives involves estate tax planning, then it is recommended that each spouse have a separate revocable trust and each trust should be funded during life.

While it is possible for a joint revocable trust to avoid estate taxes upon death, these trusts are often not funded properly or not administered carefully during life, which then results in either not achieving the desired tax results or causes significant administration problems after death, or both.

Spouses should also consider having separate trusts to protect assets after death from the surviving spouse's creditors and potential future creditors, or if there are other factors involved, such as children from a prior marriage, a prenuptial agreement or a family business.

Choose Your State

New Hampshire's trust laws and tax laws arguably make it the most favorable state for trusts in the nation. For those who do not live in NH, the state you live in might be fine for your trust, but it also might not be the best state. Working with an attorney who is knowledgeable in the trust and tax laws of multiple states is recommended to ensure that all options are considered.

It Is Revocable

You can amend or revoke your revocable trust; and even if you are incapacitated, your trust may be revised by someone else if you give her or him the power to do so in the trust. In fact, you can give someone the power to revise your trust after you have died, provided state law permits it.

Review your estate plan with your attorney every few years, or more frequently if there has been a change in your personal life, such as a marriage, divorce, birth, death, purchase or sale of real estate or other change in assets, or if there has been a change in the law that affects your existing plan.

Michael P. Panebianco is of counsel at Sheehan Phinney Bass + Green PA in Manchester. For more information, visit sheehan.com.