What is a revocable or living trust?

First, a trust is a contract that names a trustee to manage any assets owned by the trust. A grantor (aka settlor) gives something to another person with contractual instructions as to what they can and cannot do with the property. Put simply, the grantor is giving an item to another person to hold for them until certain events occur. The trustee does not own the assets, the trust does.

Revocable trusts can be changed by the grantor or “revoked” at any time. For this reason, the courts view the property within a revocable trust as still being owned by the grantor. The grantor continues to pay taxes on any income and can control the property as if it were their own.

What are the advantages of a revocable trust?

Two main advantages of a revocable trust are the avoidance of probate and the possibility of “controlling one’s assets from the grave.” A revocable trust can hold every type of asset. If one places all of their assets in a revocable trust, there is nothing left for the probate court to do and thus there would be no need for probate court. Essentially, all of the assets have already been gifted (to the trust).

The trust becomes irrevocable at death because the grantor is no longer alive to make changes or revoke the trust. The trustee must then follow the instructions outlined within the trust document. The document could just describe how to distribute all of the assets, such as in a will, and then dissolve, or it may contain provisions for the trustee to continue to manage the assets for the benefit of the beneficiaries. These provisions may be good for protecting assets for the heirs from the issues described above. For example, the young adult beneficiary may not have access to the full assets of the trust, but rather the trustee could give out assets at certain ages, for certain events or have instructions to cut out the beneficiaries payments if they do not graduate college or run up significant debt or become chemically dependent.

What are the disadvantages of a revocable trust?

Like a will, a revocable trust offers no protection from estate or death taxes. Because the assets are still considered property of the grantor, they are, before the time of death, considered an uncompleted gift. When the assets are then gifted to the trust at death, they are subject to the same estate tax as a will.

A revocable trust, however, offers no financial protection during the grantor’s lifetime. For example, if a grantor is successfully sued, the plaintiff may still take assets from the revocable trust to satisfy their claims. Medicaid also considers assets in a revocable trust as countable assets. In other words, a person entering a nursing home must “spend down” nearly all of the assets in a revocable trust to qualify for Medicaid to help pay for their nursing home care. All of these issues stem from the basic premise that if a person has access and/or direct control of assets (such as a revocable trust – they can be forced to revoke it and use the assets) then these assets are accessible to any creditors such as a nursing home or a winning plaintiff.

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Rocco Beatrice, CPA, MST, MBA, CWPP, CAPP, MMB – Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an “AA” asset protection, Trust, and estate planning expert.