The Financial Planner

Revocable Trusts: Common Questions and Answers

Who Needs a Revocable ("Rev" or Living) Trust?

Anyone who wants privacy, continuity of financial affairs and to avoid probate should consider establishing a revocable trust. Probate is expensive and takes a long time — it may tie up assets for months or even years after the person passes. It is a public proceeding where the decedent’s assets and heirs will become part of the public record. Today that includes the Internet.

People with property in more than one state will have to go through probate court in every state where property is located. A revocable trust, also called a living trust, is a very simple way to bypass this and ensure continuity in the management of financial affairs at one’s death. 

What Is a Revocable Trust?

It is a legal entity—a trust— that represents your wishes. One way to think of it is as a service provider that holds the assets you give it and follows your instructions during life, and then distributes the remaining assets to your heirs according to your wishes at death with no intervention from anyone including probate court. A revocable trust can be changed or revoked at any time during your life. At your death the trust becomes irrevocable, and it serves as the “will” for all assets that are titled into the trust.  

In trust terminology, the person creating the revocable trust is the grantor, the person making the decisions for the trust is the trustee, and the person who benefits from trust assets is the beneficiary. With a revocable trust, the grantor holds all three roles during life. At death, a successor trustee takes over, normally a spouse or relative, and the beneficiaries you named receive the distributions in the manner you stipulated. 

During life, all income from revocable trust assets is taxed to you, the grantor. That makes revocable trusts tax neutral – no tax benefits or disadvantages as compared with individual ownership of an asset.  You don’t need a separate tax ID as you file your return under your name and social security number as usual.

 Which Assets Should be Titled Into a Revocable Trust?

Any asset that is in your name alone that is not controlled by a beneficiary designation should generally be titled into the trust.  This would include any real estate that you own, automobiles, bank accounts, and investment accounts.  On the other hand, retirement accounts, TOD accounts, life insurance, and annuities are controlled by the beneficiary designation and are not subject to probate.  Absent some other estate planning need, they should not be titled in a revocable trust. 

Accounts that are titled jointly with rights of survivorship, in tenancy by the entirety, or as community property will pass ownership to the survivor at first death and will not go through probate until the second death.  The surviving spouse should move assets he or she then owns individually into a revocable trust to avoid probate later.

Many spouses each establish a revocable trust in their own name, and split ownership of their assets between the two revocable trusts.  This helps facilitate lower Minnesota estate taxes for estates larger than $3 million by making use of some or all of each person’s $3 million estate tax exemption amount, and lower federal estate taxes for estates larger than $12.06 million by making appropriate use of the lifetime gift and estate tax exemption at first death.[1]  It also facilitates the step-up in basis for all assets owned by the trust at death. 

Who Can Be a Trustee?

Anyone who can own property can be named as a trustee. However, the grantor is almost always the trustee of his or her own trust, usually with a spouse named as successor trustee. Grantor and spouse can be named as co-trustees of each other’s revocable trusts. That way, if the assets are split between the two trusts, each spouse has the same control over the assets as if they were titled jointly. 

Consider one important situation. Let’s say you become incapacitated due to accident, illness, or dementia. You may have established a financial power of attorney with which you appointed someone to handle your money and serve as your agent. However, that person can only manage the money and accounts you have as your representative. 

They cannot stand in your place as the owner of the assets, which means they cannot buy or sell assets such as real estate or a business. Most often, they cannot open new accounts in your name or close or transfer existing ones. A trustee on the other hand, acts as the owner of the trust’s assets. The successor trustee you appoint in your revocable trust can take over and make ownership decisions during your incapacity, which may in some cases last for years. This can be a significant benefit for those with multiple accounts and many assets.

Revocable trusts established prior to marriage or to hold an inheritance are considered separate property in a divorce if no marital-property assets have been added to it. This may be particularly helpful in protecting assets for divorcing couples living in community property states.

Common Mistakes and Misunderstandings

• Revocable trusts do not protect you from creditors. The grantor has control over trust assets and thus can use them to pay bills. Irrevocable trusts, however, can have “spendthrift” provisions that do protect trust beneficiaries from creditors.
• Many people have revocable trusts established, but they fail to change the titling of their assets to the trusts. The trust can only protect from probate the assets that are titled into it prior to your death.
• Some say, “I have a will that creates a trust at my death, so I don’t need a revocable trust.” They mistakenly think that having a pour-over will (a will that “pours” the assets into a trust at their death) will keep assets out of probate. In Minnesota, estates with individually owned assets over $75,000 will go through the court’s probate process, even those that are going into a trust as directed by the will.[2] 
• Having a revocable trust does not eliminate the need for a will. The pour-over will described above is a sound planning practice to allow assets not titled into the trust to flow into it for determination of who receives what. For example, if a person dies due to an auto accident, their estate may be entitled to insurance settlement proceeds. These settlement proceeds can only be transferred from the estate to the trust pursuant to the terms of a will.
• Revocable trusts avoid probate, but assets are still considered part of the estate for estate tax purposes. Sometimes people misunderstand this because they equate “avoiding probate” with “avoiding estate taxes.”
• Revocable trusts also do not remove assets from your ownership for purposes of the Medicaid spend-down. Any asset under your control will need to be “counted” as available to spend on nursing home care until the minimum allowable asset level is reached.

Footnotes

1. Minnesota estate tax and federal estate tax exemption amounts are for 2022.
2. There is an exemption from probate for small estates, one that varies by state. In 2022 in Minnesota, estates with less than $75,000 in total assets are not subject to probate.

Suzanne Tudor

Suzanne has over 35 years of experience in financial services, retiring in 2024. She was a senior investment consultant and director of financial planning at Allodium Investment Consultants, located in Minneapolis, MN. Suzanne was passionate about helping families and business owners to strategically develop and carry out their financial, legacy and philanthropic plans. Since retiring, Suzanne has had extra time for activities she loves, such as spending time with her family and making DIY home improvements.

The information provided is for educational purposes only and is not intended to be, and should not be construed as, investment, legal or tax advice. Allodium makes no warranties with regard to the information or results obtained by its use and disclaim any liability arising out of your use of or reliance on the information. It should not be construed as an offer, solicitation or recommendation to make an investment. The information is subject to change and, although based upon information that Allodium considers reliable, is not guaranteed as to accuracy or completeness. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment.