OVERVIEW OF REVOCABLE TRUSTS
© Copyright 2011 Lee A. Drizin, Chtd.
Revocable trusts can be used to achieve a variety of goals, including avoiding the “probate process”, providing a mechanism to manage property during the owner’s lifetime (especially during any time that the property owner experiences difficulty in managing his financial affairs), and as an arrangement to facilitate later financial and estate planning.
The Probate Process.
“Probate” refers to the legal proceeding by which property is passed after death of a person regardless of whether they had a will. Not only can the proceeding be expensive and time consuming but it offers no privacy. All probate matters are filed with the County Clerk and may be inspected by any member of the public.
General Cost Effectiveness of Avoiding Probate.
Assets subject to the probate process may be subject to several expenses. These may include the commissions of a personal representative (executor or administrator), attorney’s fees, fees paid to guardians ad litem who represent minors and other persons under legal disability who have an interest in the estate, filing charges, fees of court-appointed appraisers and accountant’s fees. The commissions of the personal representative (or administrator) can be avoided or reduced by eliminating or reducing the amount which passes by will; however, to the extent the property is disposed of by the revocable trust there may be fees for the trustee instead of those of the personal representative. A property owner usually can condition someone’s appointment as personal representative (or trustee) upon that person accepting a lower commission than that provided by law, or no commission at all. If the person accepts the appointment, savings on commissions may be achieved whether a revocable trust or will is used as the primary instrument to pass assets at death. One of the most significant costs associated with the probate process are the attorney’s fees. These fees may be charged on an hourly or percentage basis. If the latter, the Nevada Revised Statutes set forth the amount which may be charged. In general, the fees for preparation of a trust exceed those of preparing a will; however, the attorney fees to complete the probate process at death will usually far exceed those to assist with the disposition of the property from the Trust.
Confidentiality and Revocable Trusts.
The revocable trust may offer advantages other than the potential costs savings in avoiding the probate process. For example, a property owner’s will and, in some cases, the assets or the amount it disposes of, may be a matter of public record. Some individuals wish to maintain confidentiality with respect to the nature of dispositions made at death and/or the nature of their assets. A revocable trust is more likely to achieve that confidentiality, although some local courts may require a disclosure of the terms of the revocable trust and the assets it holds. Nonetheless, overall, the probability of the confidentiality being maintained is almost always greater with a revocable trust rather than with a will.
Delays in Administering Property.
Considerable delays in having the will admitted to probate or having the court render decisions necessary to commence or complete certain aspects of the administration of the property passing under the will may occur. Although these delays are more likely to be avoided by using a revocable trust, the administration of the trust, including distribution of property to beneficiaries, may similarly be delayed if certain legal action is commenced with respect to the trust (e.g., a claim that the trust is invalid).
General Effects of Transferring Assets to a Revocable Trust.
As a general rule, no adverse effects occur by the transfer of property to a revocable trust during the owner’s lifetime. Real property may be transferred into the revocable trust without incurring any transfer taxes. However, there are some possible adverse tax effects. For example, losses on certain stock described in Internal Revenue Code Sec. 1244 which can be deducted against ordinary income may not be deductible if such stock is held by a revocable trust. An attempt to transfer an interest in an individual retirement account (IRA) might constitute a taxable disposition subjecting the transferor not only to income taxes but penalties as well.
Revocable Trusts As Lifetime Management Vehicles.
Many individuals engage professionals to manage their assets, such as securities, real estate and collections. A common form of management for securities is a stock brokerage account which, in some cases, may provide the account representative with discretion in making certain decisions, such as to buy and sell assets under certain conditions. A revocable trust may be an excellent vehicle to manage assets. It involves a well-defined relationship which generally will require the professional manager to act in a fiduciary manner and to have liability as a trustee. Although costs may be associated with naming a professional manager as a trustee or a co-trustee of a revocable trust (such as trustee commissions), these costs may not be greater (or not materially greater) than if the professional manager were hired under another form of arrangement. Nonetheless, some institutions (such as investment banking firms) may not be permitted to act as trustee whether under a revocable trust or by will. In some cases, this prohibition usually can be avoided effectively by naming a person affiliated with the institution to serve as trustee until that person is no longer affiliated with that company.
Many individuals may experience significant difficultly in managing their financial affairs. This difficulty may be short-term or long-term. In some jurisdictions, a conservator or other fiduciary (e.g., a guardian or committee) will be appointed in a legal proceeding to take over the management of the assets of a person who becomes incapacitated. However, these proceedings are usually a matter of public record, may cause embarrassment to the individuals involved or may engender litigation among family members for the right to serve as the fiduciary (and thereby control the individual’s wealth). The proceedings can be costly and often may involve the appointment of an attorney as a guardian ad litem for the individual who is the subject of the proceeding. However, the revocable trust contains provisions for the incapacity of an individual for the appointment of a successor trustee who will charged with the fiduciary responsibility of managing the assets for your benefit until you are well enough to continue administration of your trust.
The information presented herein is general information only and should not be considered legal advice nor should you rely solely upon this information in taking any actions regarding your matter. While no attorney-client relationship is formed by supplying this information, please do not hesitate to contact us at (702) 798-4955 to schedule a time to discuss your particular circumstances.