Revocable Trusts Explained
Revocable trusts can be used to help ensure your financial wishes are met while you are living and after death. Here’s a summary of how they work.
What Is a Trust?
A trust is a legal entity that exists separately from the person who created it. It can be used as an ownership vehicle to avoid the probate process at death, minimize estate taxes and provide guidance for the creator’s care and financial management in the event of incapacity.
How Does a Revocable Trust Work?
In a standard revocable trust, the creator describes the details of the trust’s arrangement and retains the right to amend them or revoke the entire arrangement. Along with that, the creator names a trustee, who interprets the terms and manages the trust. The creator also names beneficiaries, who may belong to the following classes:
- Immediate beneficiary: Receives benefits as soon as the trust comes into existence.
- Remainder beneficiary: Receive benefits at trust termination.
- Intermediate beneficiary: May receive benefits after the benefits to the immediate class of beneficiaries have ceased, but before the trust ends.
Frequently, revocable trusts name the trust creator as both trustee and beneficiary, so the creator can retain control of his or her assets while benefitting from the advantages the trust provides. The trust’s terms detail the actions the trustee is to take if the beneficiary becomes incapacitated, and, very importantly, identify a successor trustee. The terms then describe what will happen to the assets remaining in the trust at the time of the immediate beneficiary’s death.
Who Do the Assets Within a Revocable Trust Officially Belong To?
After trust creation, assets are transferred to trust ownership and no longer belong to the creator, as they are now governed by terms of the trust. However, if the trust creator is also the trustee, he or she retains total, direct control over the assets. Similarly, at the death of the trust creator, the assets of the trust are not part of his or her probate estate. The successor trustee just follows the terms of the trust to dispose of the assets. The probate court assumes no jurisdiction over the assets of a carefully crafted revocable trust, which is a very attractive feature. Contrarily, for a will to be effective, it must be presented to the local probate court, causing it – and a list of the decedent’s assets – to become a matter of public record.
How Can You Ensure a Revocable Trust Avoids Probate?
Revocable trusts do not shelter your assets from inclusion in your taxable estate, but they can reduce transfer costs associated with the probate process. In order to avoid probate, a revocable trust must clearly dispose of its assets at the creator’s death, and that disposition should not be merely to the creator’s estate. The assets may pass outright to individuals or charity, or may continue in trust for the benefit of those parties. Any assets not owned by the trust will be included in the probate estate, so transferring ownership of assets to the trust prior to death is essential. Revocable trusts are a cornerstone of most well-drafted estate plans. Their terms can detail care in the event of the creator’s incapacity and ensure privacy and security after death. For help determining whether a revocable trust could work for your situation, talk with your Baird Financial Advisor.
Baird Trust Company (“Baird Trust”), a Kentucky state chartered trust company, is owned by Baird Financial Corporation (“BFC”). It is affiliated with Robert W. Baird & Co. Incorporated (“Baird”), (an SEC-registered broker-dealer and investment advisor), and other operating businesses owned by BFC. The information offered is provided to you for informational purposes only. Neither Baird nor Baird Trust is a legal or tax services provider and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action. The information reflected on this page is subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor. Investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor or a member of your Baird Trust team before taking action.
