Do I Need a Revocable Trust?

Many years ago, my husband and I drafted our estate documents after our first child was born. Our assets were quite simple. We owned a home together and utilized joint checking and savings accounts at the bank. We each had term life insurance, IRAs, and held 401(k)s with our employers. I knew we could save a little money if we asked our attorney for a simple will, but I also knew incorporating revocable trusts into our plans was the wise thing to do. It would cost a little extra, so I wondered, “Do we really need revocable trusts? Our situation is so simple.” At Bragg, we find ourselves answering the same question with our clients today who have simple wills or who are revisiting their estate plan.

Since financial planning is what many of us at Bragg do every day, we can discuss this topic in great depth and risk exhausting you in the process! We can review each asset on your balance sheet, how it might flow by joint ownership or by beneficiary designation, and then discuss the plan for any remaining assets to pass by the terms of your will or revocable trust. This is the point where clients often ask the very same question I had, “Do we really need revocable trusts?” More and more we are finding that we land at the same conclusion: Revocable trusts are the best vehicle to outline the way your assets will flow upon death. Many of the estate planning attorneys helping our clients relay the same message.

The rest of this article will focus on the reasons for this conclusion.

How does my will work with or without a revocable trust?

• Stand-alone will: Your will can provide clear direction for the disposition of your assets. It can even include provisions for trusts to be created at your death. You are probably thinking, well then why can’t I just have a will? There are two major reasons:
  • Difficulty—The Clerk of Court monitors the probate process which Executors must follow. When assets pass via your will, each asset must be accounted for, valued, and distributed under supervision of the court. This process is called probate. We have been told by attorneys with whom we partner that navigating this court system has become increasingly difficult. The waits are long and Executors often end up making multiple trips, as it is difficult to know all that will be needed at each step along the way. Your Executor is required to check in with the Clerk of Court at various points throughout the process. In order to reduce this time and expense, the fewer assets that pass via the direction of your will, the better. It is useful to note that the probate process varies by state. The majority of your estate will be processed by probate in the state in which you reside at the time of your death. Any assets (real estate, land, etc.) you own in a different state will be probated separately in that state. You should consult your attorney regarding the time and expense of the probate process in the state in which you reside, as these details may vary from one state to the next.
  • Privacy—When you pass away, your will is filed with the Clerk of Court by your Executor and it, along with the details of assets passing by that will, becomes a public record at this time. Any person may view a public record or request a copy of public record for a fee. Unfortunately, there are people who make it their business to read wills and become familiar with the beneficiaries and the terms. As an example, if your will is the document that outlines trusts created for your children or grandchildren, anyone can access when these beneficiaries might have access to these inherited funds. They can also see the size of your estate assets. If there is any sensitive information you would rather not be viewable by the public, then it is best not to include it in the will.
• Pour-over will in combination with a revocable trust: Even if you have a revocable trust, you will still need a will. At a minimum, the will includes the name of your Executor, the name of your Guardian for any minor children, and “pours over” your remaining assets to your revocable trust. Because the revocable trust does not become a public record, any disposition outlined in this document remains private. Assets owned by the revocable trust do not have to pass via probate, thus avoiding the process described above and remaining private. This is a huge benefit.

What is a revocable trust?

Jen Muckley recently described how a revocable trust fits in an estate plan in her article Preparing Your Will with the following:

“You might be wondering, where does a revocable trust fit into all of this? Commonly, individuals will create a very simple will that primarily states that all assets will be distributed into his or her revocable trust. This kind of planning is often called a “pour-over will and revocable trust” because the will simply “pours” out directly into the trust. We are seeing more attorneys recommend this type of planning…”

Your revocable trust, rather than your will, can outline the specific disposition of your assets, contingency plans, establish trusts for children or grandchildren, outline details of how the trusts and assets should be distributed over time, etc.

Once your pour-over will and revocable trust documents are drafted, reviewed, and signed, your attorney will provide instructions for updating the titling of your assets, as well as instructions on how to structure your beneficiary designations. It is key that you follow through on these instructions. If your revocable trust does not own any assets upon your death, or if it is not the recipient of assets via beneficiary designation, then there was not much use in putting the document in place. Assets titled in your name individually without a beneficiary designation will still make their way to the trust but they will arrive after passing by your will through probate.

What assets do you title in the name of the revocable trust?

This depends on your particular situation, and you should always defer to your attorney for this question. The following is what we see in general:

• Savings and investment accounts. Often, savings accounts and investment accounts can be titled in the name of your revocable trust during your lifetime. Your social security number remains as the tax ID number on the account and you have the same control over the account as you did when it was in your own name.
• Tangible personal property. Your attorney might recommend you assign your tangible personal property to your revocable trust. This is more common when antiques, collectibles, valuable art, and jewelry are owned.
• Out-of-state real estate. If you own real estate in another state from which you reside, it is often recommended to title this in the name of your revocable trust to avoid the probate process in multiple states (see above).
• Primary residence:

• • If you are single, attorneys often recommend titling your home in the name of your revocable trust.
  • For married individuals, owning their home as “tenants by the entirety” or “joint with right of survivorship” is often the way to keep things simple and maintain special creditor protection offered to real estate owned by spouses. Additionally, a North Carolina statute allows for “tenants by entirety” property to be transferred into a revocable trust and still maintain this creditor protection, which is a great option if your attorney suggests you title your primary home in the names of your revocable trusts.
• Automobiles. While you might be able to change your car title to reflect your revocable trust as the owner, it will likely not be worth the trouble of doing so. Joint ownership is simplest if you are married.

What about my operating checking account?

If you are married, “joint with right of survivorship” often keeps this simple and easy, as it avoids probate. Some banks may allow you to name a payable on death (POD) beneficiary on a joint account, allowing you to name one of your revocable trusts in the event of simultaneous death. If this is not an option, then once the first spouse passes, see options in the next bullet for how to handle an account when you are single.

If you are single, there are more options and factors to consider:

• Your attorney may recommend you title the account in the name of your revocable trust.
• Your revocable trust may be named as beneficiary via a POD or TOD (transfer on death) designation.
• If your executor will need immediate funds to pay funeral and other expenses, the following are options to consider, but please note the multiple warnings and discuss this with your attorney:
  • You can make an account joint with your executor. Keep in mind that joint ownership allows either joint owner to withdraw any or all of the funds at any point during your lifetime or after. And there is no obligation for the surviving joint owner to use the funds to pay these final expenses. The account is also subject to creditor claims of this joint owner. This situation may only work when there is a high level of trust and commitment.
  • You can make a trusted friend or family member the beneficiary of the account via a POD or TOD designation. This keeps the account in just your name during your lifetime. But, as in the case above, there is no obligation for this person to use the funds for final expenses.
  • In both options above, if the account receives a large deposit at some point before your death, the unintended consequence could be that one person receives a larger inheritance than intended.

Can I make all of my non-retirement accounts TOD or POD, so that they pass by beneficiary designation?

The problem with TOD and POD is these beneficiary designations can’t address the possible eventualities addressed by your trust. Further, the total share received by your heirs can be dramatically affected by balances held in such accounts. The revocable trust becomes a funnel for almost all assets, ensuring the disposition you plan.

Can my revocable trust be the beneficiary of my IRAs and retirement plans? 

As a reminder, your IRAs and retirement plans pass via their beneficiary designation. You can name your revocable trust as the beneficiary of these plans. Due to complicated income tax implications of naming a trust as beneficiary of a retirement plan, please coordinate this decision with your attorney. There are many factors to consider such as the age of your beneficiaries, amount they would receive, whether trusts will be beneficial for your beneficiaries, current income tax law, etc.

Can my revocable trust be the beneficiary of my life insurance?

Life insurance also passes via your beneficiary designation. You can name your revocable trust as the beneficiary of your life insurance policies. But again, it depends on the purpose of the policy and you should discuss with your attorney. If liquid funds will be needed by beneficiaries as soon as possible after death, naming them directly may be better. Some life insurance is owned by an irrevocable trust, in which case it will flow by the provisions outlined in this specific trust.

Please keep in mind, this article focuses on the question of “Do I need a revocable trust?” If you have questions about what to consider within your estate plan and how to get started, please see a few of our other resources:

• Estate Planning 101, by Lynn Araujo, CFP®
• Estate Planning Isn’t Just for the Super-Wealthy, by Jen Muckley, CFP®, AEP®, CTFA®
• Preparing Your Will, by Jen Muckley, CFP®, AEP®, CTFA®
• Where Are Your Documents, by Mary Lou Daly, CPA, CFP®
• One Last Gift: A Planning Guide for Survivors, by Debbie Taylor

This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.