In recent years revocable trusts have become a popular and quite
common estate planning tool.
Many people, both young and old, utilize revocable trusts to pass
assets to their spouse and the next generation free from probate, to
plan for incapacity and in some cases to minimize estate tax
A trust is an agreement, usually in writing, between two parties.
The first party is the settlor, or the person who sets up the trust,
and the second party is the trustee, or the person who manages the
trust and holds legal title to the assets.
In most revocable trusts, the settlor and the trustee are the
same person. The beneficiary of the trust is typically the settlor
during his or her lifetime, and at the settlor's death the trust
provides for the disposition of the assets to the settlor's spouse
if he or she is living, and if not to the settlor's children -- or
whomever the settlor directs in the trust agreement.
The disposition of assets can be as simple as equal distributions
to the children or as complex as providing for long-term trusts to
provide income payments to the beneficiaries and distributions at
specified ages, or generation-skipping provisions to pass assets to
beneficiaries two or more generations below that of the settlor. Of
course, these complex provisions are complicated and should be
considered only after consultation with a professional experienced
in estate planning and tax law.
For a revocable trust to be effective, however, it is critical
that the ownership or title to the settlor's assets be transferred
to the trust -- known in the legal world as funding the trust.
This includes transferring the ownership or title to real
property (or land), mineral interests, personal property such as
vehicles, bank accounts, investments, stocks and bonds. For example,
to transfer the ownership of the settlor's home to the trust, the
settlor would execute and record a deed conveying the property from
the settlor individually to the trustee of the revocable trust --
John Doe, trustee of the John Doe Revocable Trust.
In the introductory paragraph, we said that revocable trusts are
used to pass assets to the next generation free from probate. This
is accomplished by changing the legal title of the settlor's assets
from the settlor individually to the trustee (funding). If all of
the assets are transferred to the revocable trust prior to death,
the settlor legally owns no assets in his or her name and therefore
avoids the need for probate.
Revocable trusts are also used to plan for incapacity in that
they enable the settlor to name an individual to take over the
management of the trust property should the settlor become disabled
or otherwise is unable to act on his or her own behalf. The language
of the revocable trust agreement should outline how the settlor's
disability or incapacity is to be determined.
In some cases, the use of a revocable trust could enable the
settlor to reduce or eliminate his or her estate tax liability. By
"stacking" their unified credits in 2000, a married couple could
pass $1.35 million free from estate tax.
This is accomplished by using a credit shelter trust or bypass
trust -- two names for the same type of trust. At the death of the
first spouse, $675,000 (increased through 2006 to $1 million) worth
of assets are transferred to a credit shelter trust usually titled
the family trust to benefit the surviving spouse and children for
The balance of the assets pass to the surviving spouse through a
marital trust, taking advantage of the marital deduction. Therefore,
at the first death no estate tax is due. At the second death the
$675,000, including appreciation, held in the family trust would
pass to the contingent beneficiaries -- usually the settlor's
children. The assets in the family trust pass estate tax free to the
children. The surviving spouse can utilize his or her $675,000
unified credit while passing assets held in either the marital trust
or his or her revocable trust to the beneficiaries, and the only
assets subject to estate tax are those exceeding $675,000. …