Number 1: Avoidance of Probate
Establishig a revocable trust, and properly funding the trust, avoids probate on assets that would traditionally trigger probate. These assets include real estate and privately held businesses. By setting up a revocable trust, these assets can be retitled in the name of the trust so surviving family members can more seamlessly transfer these assets after the Grantor dies, without having to go through probate to gain control. Probate is a public court process, handled through the local county probate court. The process takes months (or years), requires archaic paperwork, newspaper publications, and official notices. It is best avoided and having these assets in a trust can speed up the transfer process.
Number 2: Extended Control of Assets for Beneficiaries
Establishing a revocable trust allows you to delay when beneficiaries will receive control of trust property. This is beneficial as it may not be ideal for an 18-year-old to receive a large lump sum of assets. Many young adults may not be mature enough to manage a large sum of money on their own into their 20s or 30s and may need supervision. When minors are beneficiaries in a will, rather than a trust, they will receive their share of assets outright upon turning 18. While a Uniform Transfers to Minors Act (UTMA) Account can extend this age to 21 for certain assets, many clients are more comfortable with their children receiving control of assets somewhere between 25 and 30 years old.
A revocable trust allows the grantor to decide what age they would like beneficiaries to receive control of trust assets. The grantor will also name trustees to manage those assets until the beneficiaries reach the age of control. Note that the trust property is not in a locked box; it gives trustees the ability to make distributions to beneficiaries as they deem appropriate or for certain purposes such as the beneficiary’s education or for uninsured medical expenses. It also gives trustees the discretion to withhold a distribution to protect beneficiaries from their creditors, including divorcing spouses.
Number 3: Creditor Protection for Beneficiaries
A revocable trust provides significant creditor protection for beneficiaries. If a beneficiary gets divorced or sued, money in their parents’ trust is not reachable by those creditors, except in limited circumstances. Most clients want to give assets to their adult children but are worried about what might happen to those assets if their children get divorced. Putting assets in a trust that is available to children, but not owned by them, allows them to reap the benefits of those assets without exposing those assets to creditors. Note, however, that the person who set up the trust does not receive the same creditor protection as their eventual beneficiaries.
Number 4: Estate Tax Minimization
In Massachusetts, net worth above $2m is taxed at death, except that an unlimited amount can pass to a spouse estate tax-free (with a few exceptions). Simply leaving all of your assets to your spouse may seem like an easy and sensible plan, but if the surviving spouse is left with all the assets, this could potentially put them over the estate tax exemption of $2m, with the first deceased spouse effectively wasting his or her exemption. Instead, if assets are in a revocable trust when the first spouse dies, the second spouse has access to those assets without everything being included in the surviving spouse’s estate (the first $2m in the deceased spouse’s trust at death is not included in the survivor’s estate).