Academic journal article Journal of Accountancy

Revocable Trusts: Appealing, but Beware; There's More to Revocable Trusts Than Just Avoiding Probate

Academic journal article Journal of Accountancy

Revocable Trusts: Appealing, but Beware; There's More to Revocable Trusts Than Just Avoiding Probate

Article excerpt

The revocable trust is a valuable estate planning tool. But it isn't the estate planning cure-all as marketed by some. As a result of the aggressive marketing of revocable trusts in recent years, CPAs are likely to find their clients inquiring more and more about their use. A revocable trust's main selling point is its ability to avoid probate. Since probate can be a costly and lengthy process, the revocable trust has become popular as a probate-avoidance tool.

Most promoters of revocable trusts are familiar with their probate-avoidance aspects. However, CPAs, as financial advisers, are in a position to evaluate all the advantages and disadvantages of recoverable trusts and should be able to make objective determinations about whether such trusts meet client needs.

Once a decision is made to use a revocable trust, the CPA can work closely with the client's attorney in the early stages of the drafting process. The CPA's early involvement will accomplish two goals:

1. It will ensure the trust is drafted to meet all the client's appropriate financial planning objectives.

2. It may reduce fees by avoiding costly rewrites if the client's objectives have been communicated properly to the attorney.

What is a revocable trust? Also known as an "inter-vivos," "living" or "family" trust, a revocable trust is one established during the lifetime of the grantor, who retains the power to change or revoke it as he or she wishes. Since the trust is revocable, the grantor has complete control over the assets assigned to it. Typically, the grantor serves as trustee and may appoint a professional trustee (such as a CPA) as successor trustee. The trust document outlines instructions for managing and distributing trust assets.


Incapacity. With a living trust, a trustee can be appointed to manage the grantor's financial affairs in the event he is incapacitated; without such a trust and trustee, someone has to ask the court to declare the individual incompetent. This process can be expensive and embarrassing. Some states require the incapacitated person to appear in court during guardianship proceedings. Such proceedings can also spur family conflicts and the result in nasty and expensive court battles.

A revocable trust can avert such an outcome by providing a contingency plan to deal with the inability of the grantor to manage his own financial affairs. With a revocable trust, an individual can specify in advance who he wants to manage his affairs in the event of incapacity. A revocable trust is not, however, the only vehicle to provide for such a contingency. Similar results can be achieved by granting someone a durable power of attorney, although that durability is often challenged. Some financial institutions, such as banks and insurance companies, may not accept a power of attorney without a clear legal ruling in the state involved as well as the prior approval of the institution itself.

Probate. A revocable trust avoids the delay and expense of probate. Probate can be expensive, particularly for largest estates in states where attorney and executor fees are fixed by law as a percentage of the probate estate. Legal fees and court costs can amount to 5% to 10% of the estate's gross value. Probating an estate generally will take at least six months, and often longer. In the meantime, the executor may have to petition the court for distributions from the estate to support the family.

In contrast, the cost of settling a revocable trust is typically 1/2% to 1% of the estate. A trust may be settled in a matter of weeks. Also, the trust document may specifically provide for interim distributions to the surviving spouse.

Publicity. A revocable trust avoids the publicity of probate. The grantor can name beneficiaries in a trust he does not want the public to know about. However, some states require estate tax returns, which typically include copies of all trust documents, to be filled with the probate court even when probate is not needed. …

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