Revocable trusts — also known as “living” trusts — offer significant benefits over wills, including asset management (in the event you become incapacitated) and probate avoidance. But these benefits aren’t available if you don’t fund the trust.
A revocable trust acts as a will substitute, although you’ll still need to have a short will, often referred to as a “pour over” will. The trust holds assets for your benefit during your lifetime.
The trustee can be you or someone you select. If you choose to be the trustee, you must name a successor trustee to take over as trustee upon your death, serving in a role similar to that of an executor.
Under a revocable trust, you retain the same control that you had before you established the trust. Whether or not you serve as trustee, you retain the right to revoke the trust and appoint and remove trustees. If you name a professional trustee to manage trust assets, you can require the trustee to consult with you before buying or selling assets.
The trust doesn’t need to file an income tax return until after you die. Instead, you pay the tax on any income the trust earns, as if you had never created the trust.
Asset ownership transfer
“Funding your trust” means to transfer ownership of assets to the trust. Assets that you should transfer include real estate, bank accounts, certificates of deposit, stocks and other investments, partnership and business interests, vehicles, and personal property (such as furniture and collectibles).
However, certain assets shouldn’t be transferred to a revocable trust. For example, moving an IRA or qualified retirement plan, such as a 401(k) plan, to a revocable trust can trigger tax consequences. And it might be advisable to hold a life insurance policy in an irrevocable life insurance trust to shield the proceeds from estate taxes.
Don’t forget to transfer new assets to the trust
Most people are diligent about funding a trust at the time they sign the trust documents. But when assets are acquired after the trust is established, there is a tendency to neglect to transfer them to the trust. Unless they are transferred, they won’t enjoy the trust’s benefits.
To make the most of a revocable trust, be sure that each time you acquire a significant asset, you take steps to transfer it to the trust. An attorney at TuckerAllen can answer any questions you might have regarding your revocable trust.