Since the estate tax exemption now surpasses $5 million (but remains at $1 million in Massachusetts), many believe their revocable trust has become obsolete. The truth is, a revocable trust offers many benefits a plain old last will and testament can’t. Understanding why it’s still important to have a revocable trust will position you as the trusted advisor who can spot the issues and then call in your expert team of partners to fix the problems.
Four Investment Management Advantages of Revocable Trusts
#1 – Revocable Trusts Help You Faithfully Implement Your Investment and Distribution Strategies. Custodians freeze accounts owned individually by a decedent, which can complicate your asset management process, especially if you’re tactical or are making periodic distributions. But revocable trusts with co-trustees or successor trustees can be managed seamlessly, without the need to open another account and transfer assets.
#2 – Revocable Trusts Simplify Management of Illiquid Alternative Assets. This is especially true of real estate, private equity, and private debt. Normally it is much simpler to alert an issuer/sponsor about a change in the acting trustee(s) than to retitle such assets, especially since many sponsors fail to offer Transfer on Death provisions. And, if these investments are spread across multiple states, a revocable trust also avoids opening probate in each jurisdiction.
#3 – Revocable Trusts Reduce Paralysis or Rash Changes During Times of Grief. Grieving surviving spouses often either suffer from decision-making paralysis or opt for wholesale investment strategy changes. By holding assets in trusts, you lighten such clients’ decision–making load during a stressful time, and help them avoid rash changes instigated by new account and transfer paperwork. Depending on the mix of assets and the current market price, premature liquidation may produce a disappointing outcome.
#4 – By Helping Surviving Clients Avoid Rash Changes, You Add Tax Alpha. While all the assets in some revocable trusts may enjoy a step-up in basis, in many cases those notionally owned by the surviving spouse will not. If their basis is low and a surviving spouse opts for a wholesale sell-off, it may lead to unnecessarily large capital gains taxes.
Four Things a Trust Can Do That a Will Can’t
#1 – Act as a Disability Plan. A revocable trust provides protection during three phases: what happens while the trustmaker is alive and well, what happens if the trustmaker is alive but not so well, and what happens after the trustmaker dies. It’s during the second phase that a trust really outshines a will – if the trustmaker becomes incapacitated, the disability trustee can step in and take care of things immediately and without court intervention. This keeps the trust property under control of a trusted family member or friend instead of a guardianship judge.
#2 – Keep Assets Outside of Probate. Probate is a time-consuming and costly court-supervised public process. A will-focused estate plan lands heirs squarely in probate court. A trust-focused estate plan allows the settlement trustee to step in carry out the trust maker’s final wishes without any court involvement or oversight.
#3 – Keep a Minor’s Inheritance Outside of Guardianship. A minor who is named as the beneficiary of a life insurance policy, IRA, or payable-on-death account will require a court-appointed guardian to manage the property until 18. On the other hand, a trust for the minor can be created in a revocable trust and named as the beneficiary of the policy or account. This allows the client to decide how long the trust will continue – age 25 or 30, or even the beneficiary’s lifetime – not just until 18.
#4 – Keep Final Wishes Private. A will filed for probate becomes a public court record, which means anyone, including predators and your competitors, can go down to the local probate court and read wills and other probate documents. On the other hand, a revocable trust is a private document that remains confidential during life and after death.
How Your Practice Will Benefit From Accounts Held in Revocable Trusts
Clients who have their accounts in revocable trusts make your day-to-day practice easier because:
● All assets will be kept private so your competitors and other predators don’t know who inherited what and how to contact them.
● Avoiding probate often reduces settlement costs significantly leaving more assets under management.
● Assets held in trust can be protected from lawsuits, divorces, bad decisions, and addictions, thus, keeping more assets under your management.
● Clients will value your help in keeping their assets outside of guardianship and probate and their final wishes private.
● Clients will appreciate your comprehensive approach to their financial planning and refer family and friends.
● You will be able to immediately work with an incapacitated or deceased client’s trusted family member or friend rather than waiting until the court decides it’s okay to get started.
● You will become the trusted advisor who sees the big picture and knows all of the pieces of the client’s financial and estate plans.
Let’s Work Together
As always, we are available to answer your questions about revocable trusts and meet with clients and prospects who are considering ditching theirs or whose will just isn’t going to provide the protections they need. If you have a trust you’d like us to review or any estate planning questions, please call (978) 825-0033.