A revocable trust is a legal entity created by a person (called the “settlor” or “grantor”) to hold assets during his/her lifetime, and to dispose of those assets upon death. The central feature of a revocable trust (sometimes referred to as a living trust or an inter vivos trust) is that it can be modified or revoked by the settlor/grantor at any time. At Colby&Thornes, our experienced Scottsdale estate planning lawyers can explain the circumstances under which the creation of a revocable trust makes sense for you, and if so, what type of trust(s) can provide you with the greatest benefit.
Revocable Trust Myths
You may have heard about revocable trusts, and what you have been told may be inaccurate. In that regard, several myths have grown up around the subject of revocable trusts. They include:
Myth no. 1: A revocable trust will eliminate estate taxes. Because the trust is revocable, the IRS considers the trust assets part of your estate for purposes of estate taxes. Certain types of trusts, however, may provide strategies and benefits to minimize estate tax to the fullest extent of the law.
Myth no. 2: The mere creation of a revocable trust will avoid probate. The only way this will happen is if all the decedent’s assets are in the trust at the time of death. Stated another way, a revocable trust avoids probate only for the assets that are titled in the name of the trust on your death.
Myth no. 3: A revocable trust will protect your assets from creditors. Under Arizona law, assets titled in the name of a revocable trust will be available to creditors of your estate. In addition, they are considered by the government to be owned by the individual for purposes of qualifying for Medicaid.
Myth no. 4: Placing your assets in a revocable trust will eliminate will contests and challenges by unhappy family members. The truth is that a will or a trust can either be challenged or contested. While a trust or a will may be challenged by a disinherited child or other disgruntled heir, an experienced estate planning lawyer knows how properly draft the trust and otherwise establish the documentation necessary to avoid a successful challenge.
As with other estate planning tools, revocable trusts can be extremely useful, but only when they are utilized correctly, in the appropriate situations. Whether a revocable trust is appropriate in your case will depend upon your overall financial position, your family situation, your estate planning goals, and other factors.
A-B Trusts, Portability and Pour-Over Wills
While the term “revocable trust” has a specific meaning, the phrase does not begin to tell you which type of trust may be useful in a given situation, or, for that matter, the particular benefits that may flow from its use. The following are some of the general contexts in which revocable trusts can be used, and the associated pros and cons:
A-B Trusts. This type of trust is created by a married couple. In some cases, it can reduce estate taxes. Here is an example. A couple has combined assets of $20 million and titles the assets in a revocable trust. If each spouse leaves everything to the other, when the first spouse dies, his or her share, worth $10 million (assuming community property), goes to the other spouse. There is no estate tax due because of the concept of unlimited marital deduction. When the second spouse dies (assuming assets of $20 million), however, a significant tax could be due on the amount in excess of the single exempt amount of the surviving spouse ($5.49M in 2017 adjusted yearly upwards by CPI). Married couples can maximize the use of both of their federal exemptions (and preserve the exemption of the first spouse to die) thereby reducing estate taxes to heir children/heirs by using the A-B Trust. The A-B Trust system is set up under the couples’ revocable living trust. The “A Trust” is commonly referred to as the Survivor’s Trust. The “B Trust” is also commonly referred to as the Bypass Trust or the Credit Shelter Trust or Family Trust (holding assets up to the exempt amount of the first to die). It can result in estate tax savings to children/heirs and avoid the expense of filing a Form 706 Estate tax return in certain cases, but still preserve the exemption of the first spouse to die.
Portability Election. Effective retroactively to 2010, federal law allows a surviving spouse to utilize any portion of the available and unused estate tax exemption of the first spouse to die without the need to create an AB trust on first death. It’s one thing to say that the portability election exists; it’s quite another to take the steps necessary to properly exercise the election. In most cases, the portability election is made by the surviving spouse and must be made within 9 months after the date of death of the first spouse to die. The election requires the filing of a Form 706 Estate Tax Return. These filings can be expensive. An extension may be obtained for up to 6 months, by filing the appropriate form with the IRS on or prior to the due date for Form 706.
A-B Trusts vs. Portability Election. Because of the increases in the estate tax exemption and the availability of the portability election, A-B trusts are not used as often as they once were. On the other hand, there are many situations in which the creation of an A-B trust has advantages, including cost savings, over an election of portability by filing a Form 706 Estate Tax Return. Talk to your estate planning attorney to learn more. So, for some couples whose estate exceeds the singe exempt amount but is less than the double exempt amount, an A-B trust may be more cost effective during administration than the filing of a Form 706 Estate Tax Return, and disclosures to the IRS are also avoided. Finally, if you have an A-B trust that was created some years ago, and your assets are substantially below the singe estate tax exempt amount, you should speak to an estate planning lawyer to determine its current effectiveness given recent changes in the law.
Pour-Over Will. A pour-over will directs that upon your death, all the assets in your estate are transferred (poured over) into a revocable trust you create during your lifetime. The revocable trust document determines how the assets will be distributed. A pour-over will simply pours to the revocable trust all assets titled in your name, and not in the name of the trust, on your death. However, the assets that are “poured over” to the trust must go through probate. This problem is solved by titling all the taxable assets of the estate in the revocable trust making the pour over will superfluous.
Revocable Trust Lawyer in Scottsdale, AZ
These are just some examples of how a revocable trust may be useful in estate planning. Whether a trust would be helpful in your case is a matter best discussed with a Phoenix estate planning attorney. At Colby&Thornes, we are experienced at analyzing our clients’ financial position, their assets, and their goals. Call us to discuss whether a revocable trust might be appropriate as part of your overall estate plan.