Have you ever heard someone referred to as a “trust fund baby?” Such term usually carries a negative connotation and references a younger person whose parents established a trust fund which provides for the child’s financial security for life. Such term also perpetuates an unfortunate misconception: that trusts are only available to, and utilized by, affluent members of society. I write this article to quash this misconception and to tell you of the utility of perhaps the most simple form of trust, the revocable trust, and why everyone, regardless of income, wealth, or status, should consider establishing a revocable trust as part of their estate plan.
INTRODUCTION
With any trust, an individual (referred to as the “grantor” or “settlor”) will transfer property to another (“trustee”), who will hold and distribute such property to those the grantor provided for in the trust document (“beneficiaries”). With a revocable trust, the grantor, trustee, and one of the initial beneficiaries are almost always the same person. Practically, the only real change that has occurred is that assets originally titled in your name are now titled in the name of your newly established and funded revocable trust. Your assets are still readily available to you as before because you, as trustee, can distribute them to you, as beneficiary.
At this point you may ask why then would you want to go through the trouble of establishing and funding a revocable trust? While revocable trusts do provide certain benefits during the grantor’s lifetime, the scope of this article will discuss what I believe to be its greatest utility, transferring your assets to your loved ones in the easiest and most hassle-free way possible.
TRANSFERRING YOUR ASSETS UPON YOUR DEATH
You are probably familiar with a will, whereby you designate the persons or entities whom you would like to leave your property to upon your death. While this seems simple enough, probate, the process your executor will have to undergo to effectuate your wishes included in your will, is slightly more complicated.[1] Probate is the court-supervised process where your will is declared to be your valid last will and testament[2], any outstanding debts you had at your death are satisfied, and your estate is distributed to the persons named in your will. The probate process, while not inherently complex, is not well understood by most people, including those named as executors under a will. In almost all instances, retaining a lawyer to handle probate administration is advisable, and in Mississippi, in fact, it is required that an attorney be retained to do so.[3] By establishing and funding a revocable trust during your lifetime, however, you can make the process of transferring your assets after your death easier for your named executor.
Scenario 1:
John Doe dies after having executed a valid last will and testament which named his wife, Jane Doe, as Executor. At his death, John owned 50 acres of real property in his name alone, a retirement account of which Jane was the sole beneficiary, and a joint checking account with Jane containing approximately $100,000. John’s will provides that all of his assets will transfer to Jane upon his death.
In this case, John’s will must be probated. His retirement account will not be included in his probate estate, as Jane was listed as the payable-on-death beneficiary. Likewise, John’s checking account will also avoid probate, as it was owned jointly with Jane. The 50 acres of real property, however, will be included in John’s probate estate. Jane, while still presumably mourning the loss of John, will have to retain an attorney to assist her in probate. The attorney goes through the required procedures of the probate process[4], and after a number of months and possibly thousands of dollars in legal expenses, the 50 acres is properly transferred to Jane.
Scenario 2:
Same as Scenario 1, except prior to his death, John engaged an attorney and established the John Doe Revocable Trust. John transferred title to the 50 acres of real property to the Revocable Trust and transferred the $100,000 to a checking account in the Trust’s name. John named himself and Jane as co-trustees and the initial beneficiaries of the Trust.
In this case, John has no assets that must be probated, as the Trust, not John, owns the 50 acres of real property and the checking account. Jane, who still must notify the holder of the retirement account of John’s death, has no further obligation to administer John’s estate during her mourning process. As she is trustee and beneficiary of John’s revocable trust, she has the same access to the assets as prior to John’s death. Additionally, unless Jane dies owning additional assets outside the trust, her estate will also avoid the probate process. Instead, the Trust will be distributed according to the terms established by John during his lifetime.
Note that this lack of necessary administration is exclusive to this hypothetical scenario, which assumes there are no estate tax issues, no need to obtain an appraisal to adjust basis under § 1014, and no creditors of John’s estate. Many, if not most, trusts will still need to be administered following the death of the grantor, however, by establishing and funding a revocable trust, you can ensure that this administration will occur outside the court-supervised probate process.
ADDITIONAL BENEFITS OF A REVOCABLE TRUST
As the name implies, revocable trusts may be revoked or amended at any time during the grantor’s life provided the grantor has capacity. This can prove invaluable, as the grantor may change certain provisions of the trust, including replacing the trustee and adding or removing beneficiaries, in light of family turmoil or unexpected circumstances. Once the trust is funded, meaning title to your assets are transferred to the trust, any minor changes of your wishes can easily be effectuated by amending your revocable trust. The process for amending a revocable trust is also generally less cumbersome than amending a will (typically via a codicil) or executing a new will, as the execution of a will or codicil must meet specific statutory requirements.[5]
Revocable trusts also provide privacy that wills do not. During the court-supervised probate process, all of your probated assets become a matter of public record. This does not occur if you’ve established and funded a revocable trust, as the court will generally not be involved. This added benefit should prove more desirable to those who do not wish for the assets passing to their designated beneficiaries to be easily identifiable.
Additionally, revocable trusts prove to be efficient vehicles for asset management if the grantor/initial trustee becomes incapacitated. Under the prior Scenario, if John were to become incapacitated, Jane, as co-trustee, would have the immediate ability to manage the trust’s assets during the time John is unable to do so. While this could also be accomplished by John appointing Jane as his agent under a durable power of attorney, Jane would have to undergo presenting the power of attorney to the relevant institutions, some of whom are reluctant to accept such. Use of a revocable trust providing for a co-trustee or a successor trustee to manage trust assets in the event of grantor/initial trustee’s incapacitation is a much easier solution.
CONCLUSION
A revocable trust is an integral tool in estate planning and can provide numerous benefits to almost everyone. These trusts are simpler than generally believed, and they should not be disregarded by anyone who wishes their assets to pass to their loved ones in the most seamless manner possible. They allow your executor to avoid the sometimes stressful and time-consuming probate process, and while typically involving more upfront costs than a will, often save money by avoiding some of the legal expenses incurred by wills during probate administration. Even after being established and funded, revocable trusts provide you with a great deal of flexibility to pivot in certain aspects of your estate plan as your circumstances change.
Revocable trusts provide a litany of benefits, including the ones mentioned in this article. I would, however, be remised if I did not emphasize the importance of properly funding the trust. Merely having a revocable trust is insufficient, and legal costs and headaches will ensue if such trust is not properly funded. You should absolutely consider establishing a revocable trust for the reasons mentioned above and more, and if you choose to do so, be diligent in making sure your assets are properly transferred to the trust.
[1] https://esapllc.com/2022-ms-probate-review/
[2] Unless you died without a valid last will and testament, in which case your estate will still need to be administered, but your assets will pass according to state intestate statute.
[3] Miss. Chancery Court Rule 6.01.
[4] https://esapllc.com/ms-estate-admin-2022/#_ftn3
[5] Miss. Code Ann. § 91-5-1.
