A revocable trust, sometimes also referred to as a “living trust” or an “intervivos trust,” raises practical questions for anyone who is considering establishing one, but the most frequent questions are 1) “will I lose control of the assets?” and 2) “will I lose access to the assets?” Trusts are not for everyone, but they can make the administration of your estate, both during lifetime and at death, easier on those you designate as your successors. Understanding the nature of a revocable trust will help you determine whether it will work for you and your family.
Mechanics of a Revocable Trust
A revocable trust is a legal arrangement that holds title to property for your benefit during your lifetime. The creator of the trust is identified as the “grantor” (also sometimes referred to as the “settlor” or “trustor”). In most cases, the grantor also serves as the initial trustee and is the sole beneficiary of the trust during his or her lifetime. This means you still control the assets in the trust, and they can be used only for your benefit during your lifetime.
To receive the maximum benefits the trust can provide, you will want to “fund” it during your lifetime. Funding is the process of retitling assets from your individual name into the name of the trust. These assets include real property, investment and bank accounts, individually-held securities, and business interests. However, the assets remain completely available to you during your lifetime, and you continue to control, manage, and use them as you did before.
Powers of the Grantor
As the creator and trustee of your revocable trust, your dual roles provide distinct authority to:
- Buy, sell and manage property held by the trust
- Move assets into or out of the trust as circumstances change
- Invest funds and decide how income is used
- Name and replace successor trustees
- Direct who, when, and how your beneficiaries will receive the assets
- Adjust the trust terms at any time
If you become incapacitated during your lifetime, the trust also has disability provisions built in so someone (the successor trustee) can manage the trust property if you are unable to do so. Your successor trustees will also step in upon your death to manage the trust property for your beneficiaries according to the direction and guidance you provide in the trust document.
Limits of a Revocable Trust
Revocable trusts provide no creditor protection for the Grantor. Under Virginia law, assets held in a revocable trust during your lifetime remain available to your creditors. Because you can access the property at any time, a court will treat the assets as belonging to your if a valid claim arises. Therefore, revocable trusts are not used for asset protection purposes.
A revocable trust also does not shield your assets from estate taxes. Because you retain control over and unfettered access to the property during your lifetime, the IRS will include the trust property in your taxable estate at death. However, the federal estate tax applies only to estates valued above the federal transfer tax exemption amount which is in effect at the time of your death. This amount is currently $15M, indexed for inflation. Virginia imposes no separate estate tax of its own.
Foundations of a Sound Estate Plan
A trust rarely stands alone, so most plans pair it with a few companion documents. First, you still need a will, but it is a very simple will, often referred to as a “pour-over” will because it’s sole purpose is to direct any assets (other than retirement accounts) which remain outside of the trust upon your death into the trust. Next, a durable property power of attorney is used to give the person you appoint (referred to as your “Agent”) authority over assets held outside the trust as well as your legal affairs if you become incapacitated. Finally, a medical power of attorney (also known by many other names) appoints an Agent to make health care decisions for you if you cannot make them for yourself.
Revisiting the plan after a marriage, divorce, move, significant change in wealth, or any other major life event helps to keep it aligned with your current circumstances and goals. An attorney can help you in determining whether a revocable trust is right for you, help coordinate the pieces of your estate plan, confirm the documents meet state requirements, and adjust the structure as your goals develop.