Why is this Topic Important to Wealth Managers? Provides a view with respect to revocable trust concepts and estate planning. Presents identifying factors of the trust, what it’s commonly used for, as well as some of the benefits and detriments of its implementation.

This week has mainly discussed the use of trusts with characteristics of complete transfers by grantors. This edition will explore the revocable nature of trusts and how they are applicable to estate planning.

The main difference between a revocable trust and one that is not is that “the settlor reserves the right to terminate the trust and recover the trust property and any undistributed income.” [1] “The creation of a revocable living trust involves either the transfer of property to one or more trustees or the settlor’s declaration that he holds the property in trust for himself and that upon his death the property is to be held for other beneficiaries.” [2]

The revocable trust is frequently used “in estate planning, especially where a person wishes to relinquish title to property but to retain a right to reclaim it later should economic need arise.” [3] It allows for the “the swift and efficacious transfer of the grantor`s property to trust beneficiaries.”

One benefit of this arrangement is that revocable trusts avoid probate—“Upon the death of the grantor, assets that are owned by the trust, rather than by the decedent, will not be subject to the probate process.” Secondly, assets in a living trust are afforded “extra protection [because]…the trustee can be given the power to withhold distributions” along with spendthrift provisions enacted by state legislators.

However, the revocable trust income is taxed to the grantor[4], “and the trust assets will be included in his gross estate upon his death.”[5] In other words, the “decedent’s gross estate includes the value of any interest in property transferred by the decedent whether in trust or otherwise, if the enjoyment of the property transferred was subject to any change at the date of the decedent’s death through the exercise by him of a power to alter, amend, revoke or terminate.” [6]

The artificial construction of the law holds that “although the grantor has relinquished title to the trust property, trust income will still be taxed to him, and the trust property will be subject to estate tax.”  [7] Even though,  “a revocable trust yields no income tax advantages during the settlor’s lifetime, significant income tax savings may be realized after his death if the trustee is given discretionary powers in the payment of income and principal.” [8]

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[1] Black’s Law Dictionary (8^th Edition 2004). Revocable Trust.  Westlaw.

[2] Bogert.  The Law Of Trusts And Trustees § 233 (2010).  Westlaw.

[3] AUS MAIN Libraries. 21 Trusts Guardianships, and Minors, A-Trust Terms –Use in Estate Plans, Subsection 8. “The Living Trust In Family Settlements”. Last Accessed 9/19/2010.

[4] Bogert § 233 citing, 26 U.S.C. § 676.

[5] Bogert § 233  citing 26 U.S.C. § 2038; Desmond, 116 Trusts & Est. 218 (1977).

[6] 34A Am. Jur. 2d Federal Taxation ¶ 143,402

[7] AUS Main Libraries Section 21.

[8] Bogert § 233

Tags: Estate tax in the United States, Law, Living trust, Probate, Settlor, Tax, Trust law, United States

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