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.
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.
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:
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:
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.
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.
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:
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.