A revocable trust, also known as a living trust, is a legal entity created to hold ownership of an individual’s assets during their lifetime. This is to be distinguished from an irrevocable trust, which is formed during lifetime with assets to be distributed to persons other than the person making the trust.
A revocable trust has three different roles. The grantor, also known as the settlor, is the person who forms the trust. The trustee is the person who administers the trust. The beneficiary is the person who benefits from the trust. Initially, the settlor, trustee, and beneficiary will often be the same person. Indeed, this is a hallmark of a revocable trust.
Over time, the roles will typically go to different people. Upon the incapacity or death of the settlor, a successor trustee will take over administration of the trust. Upon the death of the settlor, other named beneficiaries will become the beneficiaries of the trust.
Upon the death of the settlor, the trust will become an irrevocable trust – because the person with the right to revoke the trust – the settlor – is dead.
Creating a Revocable Trust
A revocable trust is often prepared by an estate planning attorney as part of the estate planning process. The settlor will need to select an initial trustee (typically the settlor), and a successor trustee, to take over upon the incapacity or death of the settlor.
During the settlor’s lifetime, the settlor will be the only beneficiary of the revocable trust. But upon the settlor’s death, the assets will be distributed immediately to the deathtime beneficiaries (known as an immediate payout trust), or held in further trust for the beneficiaries (an “in further trust trust”), and paid out to the beneficiaries under a set of rules, known as a distribution schedule. The settlor will need to create these deathtime distribution rules in creating the revocable trust.
State law varies depending on whether the revocable trust needs to be witnessed. Some states, such as Florida, allow the creation of a revocable trust without witnesses, but the provisions of the trust that take effect upon the death of the settlor would be ineffective if the trust was not witnessed in the same fashion as a will would be witnessed.
To be clear, just because the settlor will be the only beneficiary of the trust during the settlor’s lifetime does not mean that other persons cannot receive distributions from the trust. Because the settlor of a revocable trust retains the full right to revoke, amend, and withdraw from the trust, the settlor can make distributions to anyone, for any purpose, during the settlor’s life. Of course, if the settlor becomes incapacitated, a successor trustee will not have the same flexibility to distribute assets to anyone. Some revocable trusts are drafted with language directing the successor trustee to provide distributions to a spouse, or even to children, for example.
Alongside the creation of the revocable trust is often a will, known as a pour-over will. The pour-over will directs any assets in the probate estate to be placed in the revocable trust at the death of the settlor.
Once the trust instrument is drafted, assets need to be retitled into the name of the trust. This can be accomplished, for real estate, by deeding the property into the revocable trust. For assets held in financial institutions, typically new accounts in the name of the revocable trust need to be created and the assets then moved.
Administration of the Revocable Trust
While the Settlor is Alive and Healthy
During the time that the settlor is alive and able to handle his or her affairs, the settlor operates the revocable trust as if the assets still belong to the settlor – paying bills, making investments, and making gifts to family members, if warranted.
While the Settlor is Alive But Sick
If the settlor become unable to handle his or her affairs, the successor trustee will take over administration of the trust, according to the rules set forth in the trust instrument.
After the Death of the Settlor
Once the settlor dies, the trust becomes irrevocable. The named successor trustee will administer the now irrevocable trust according to the terms of the trust.
Can a Revocable Trust Be Revoked?
Yes, the settlor, during his or her lifetime, can revoke the revocable trust at any time, and for any reason. The revocable trust is revoked according to the instructions set forth in the trust instrument. State law will also specify how to revoke a revocable trust.
Florida law, for example, has specific rules about how a revocable trust may be revoked, in additional to the rules set forth in the trust instrument. Regardless as to the rules for revoking a revocable trust, the trust could be emptied out by the settlor, which would render the trust essentially with no more purpose. (If there is a pour over will that directs assets be placed into the trust, the revoked revocable trust could spring back to life, however.)
Can a Revocable Trust Be Amended?
Yes, one of the hallmarks of a revocable trust is the ability of the settlor to amend the trust at any time.
Does a Revocable Trust Avoid Probate?
Yes, the assets held by the revocable trust will not go through probate. Unfortunately, many people create a revocable trust and partially fund the trust, so that when they die, there are assets both within the revocable trust and in the probate estate. Also, in most states the only way to clear creditors is to open a probate estate and publish a notice to creditors. So probate might not be able to be avoided.
Nevertheless, one advantage of a revocable trust is that its terms can normally remain confidential. So, even if assets must go through probate, if the will is a pour-over will into the revocable trust, the will (which is publicly available for inspection) will not indicate who the beneficiaries of the overall estate plan are.
Are Assets in a Revocable Trust Protected From Creditors?
No. The assets in a revocable trust are not protected from creditors of the settlor during the settlor’s lifetime, nor from the settlors creditors at death. If the revocable trust assets are held in further trust for beneficiaries after the death of the settlor, the creditors of those beneficiaries might not be able to reach the assets of the now irrevocable trust.
An interesting Vermont divorce case held that the assets in a revocable trust, established by the husband’s father, were not part of the marital estate of the husband. As explained by the court:
However, father was always entitled to name a new beneficiary, regardless of timing or purpose of the amendment. The fact that he made this change during the pending divorce in order to avoid a circumstance in which his assets would devolve to his son and become part of the marital estate is not legally improper or fraudulent. The assets were father’s to transfer as he wished.
What is a Pour-Over Will?
Best practice for a revocable trust is to also create a pour-over will, which funds the trust with any assets in the probate estate at death.
Can a Revocable Trust Be Challenged During the Lifetime of the Settlor?
Normally, a revocable trust cannot be challenged during the lifetime of the settlor, because the settlor can revoke or amend the trust at any time. Whether a revocable trust can be challenged by an aggrieved heir if the settlor becomes permanently mentally incapacitated is an open question, and will vary from state to state.
Can a Revocable Trust Be Challenged After the Death of the Settlor?
Yes, a revocable trust can be challenged after the death of the settlor, on the same grounds that a will might be challenged: undue influence, lack of capacity, fraud, and insane delusion.
Does the Trustee of a Revocable Trust Have to Account to the Beneficiaries?
No. During the lifetime of the settlor, the trustee does not have to account to the beneficiaries. Whether beneficiaries could bring a breach of fiduciary duty claim against the trustee of a revocable trust is uncertain. While the settlor is the serving as trustee of the revocable trust, no breach claim could be brought against the settlor/trustee – because no fiduciary duties could be owed to others. If the settlor has stepped down as trustee, the beneficiaries might be able to bring a breach claim against the successor trustee, but state law will vary.
Under Florida law, for example, the beneficiaries of a revocable trust may bring suit against the trustee if that trustee breached the fiduciary duty owed to the settlor and/or the beneficiaries – but only after the death of the settlor.
How is a Revocable Trust Treated For Tax Purposes?
A revocable trust is disregarded for tax purposes during the lifetime of the settlor. A revocable trust will use the settlor’s social security number as its taxpayer identification number.
Are the Assets in a Revocable Trust Subject to a Surviving Spouse’s Elective Share?
State laws on elective share vary, but most states subject the assets in a revocable trust to the surviving spouse’s elective share. Florida law, for example, subjects the assets of a revocable trust to the elective share.
Are Assets in a Revocable Trust Excluded From Guardianship Proceedings?
Not always. One of the purposes of placing assets into a revocable trust is so that, in the event of the incapacity of the settlor, a successor trustee can administer the assets on behalf of the settlor without the necessity of a guardianship. Florida law, for example, allows a guardian to step into the shoes of the settlor, and can amend the trust or change who the trustee is.