Through this process you transfer all, or most, of your property to a Trustee who manages the trust assets for your benefit. Generally you are the Trustee, possibly together with a Co-Trustee. The Trust documents also names successor Trustees to manage the Trust if the original Trustees become incompetent or die.
The Trust Agreement also spells out the benefits you receive and the powers you retain. All of the income from the Trust, and as much of the principal as you need, is used for your benefit and you have the power to amend (change) or revoke the Trust. Finally, the Trust contains your directions regarding distribution of the trust assets upon your death.
Advantages of the Revocable Trust include:
- Because it is revocable, it is very flexible. You can modify it at any time prior to your death or competence.
- If all of your assets are placed in the Trust, the probate process is not necessary upon your death. The Trustee merely follows your distributive directions in the Trust Agreement. Note: Because of the nature of particular assets, is not always possible to title all assets in the Trust. Whenever a revocable trust is used, a Will should still be prepared to address any assets that are not in the trust at the time of the death. In those cases, the Will is used for limited probate purposes to distribute directly or deliver to the Trust only those assets not in the Trust. Because the Will is controlling over a few assets, the probate process and expenses may not be significant.)
- If you become incompetent, the Co-Trustee (or successor) is already in control of your assets and able to manage them for your benefit and protection.
The potential disadvantages of the Revocable Trust are:
- Because it is a more complex document than a Will, it is legally more expensive to create (see the section on Estate Planning Legal Fees).
- In order for the Trust to be effective, all your assets must be retitled and transferred into the Trust. This is another way in which the Trust is more complex and to some, more cumbersome than a Will.
While the probate process and expenses, such as court costs and Executor’s commissions, are avoided or substantially reduced with the Revocable Trust, the Trustee is entitled to commissions for administering and distributing the Trust (to learn more about Trustee commissions, click here). Unlike Executor’s commissions, which are paid one time for settling the estate, Trustee’s commissions are paid each year. The statutory annual commissions are currently 1.05% (.0105) of the first $400,000.00 of the trust assets, .45% (.0045) of the next $600,000.00 of trust assets, and .3% (.003) of all additional assets. In other words, while the Trustee payment is an annual payment, the rate is substantially less than that for an Executor.
However, for trusts in excess of $400,000.00, the annual commissions will be less than 1% per year. Additionally, the Trustee is entitled to a full 1% commission on any principal distributions from the Trust (such as upon termination and distribution of the trust assets). Like the Executor’s commissions, if a family member is chosen as Trustee there may be no commissions paid, or at least the expense goes to the benefit of a family member. If you serve as a Trustee of your own Trust during your lifetime, you will not receive annual commissions, so the cost will be only slightly more than the 1% pay-out commission on your death.
The creation of the Trust generally has no immediate tax consequences (income or gift). During your lifetime you report any income earned by the Trust on your individual return (no separate or special trust tax returns are required). Upon your death, the value of the trust assets are included in your gross estate for estate tax purposes, just as they would with a Will.
Attorney or other professional fees are still incurred at death for preparing estate tax returns and for settling the Trust (accounting, obtaining releases for the Trustee and distributing the assets). As in the probate situation, the legal and other professional fees for settlement work will depend upon the actual work involved. However, since no formal court filings or proceedings may be involved, generally the legal work is less. The total professional fees can be roughly estimated at the greater of $3,000.00 or three percent (3%) of the Trust fund.