Revocable trusts—sometimes referred to as living trusts—are an important part of many estate plans on Long Island. As their name implies, revocable trusts give their creators the right to modify or revoke the trust at any time during their lives. However, these trusts offer other benefits, including avoiding probate after death, ensuring continuous management of assets, and maintaining privacy in financial affairs
Interested in learning whether you should include a revocable trust in your estate planning strategy? Contact Futterman Lanza, LLP for an initial consultation with an estate planning lawyer on Long Island, and let’s review your long-term goals together. Our firm has offices in Smithtown, Bay Shore, Garden City, and Melville for your convenience.
How Revocable Trusts Work
A revocable trust involves three parties:
- Grantor/settlor: The person who creates and funds the trust
- Trustee: The party responsible for managing the trust (usually the same person who creates and funds the trust)
- Beneficiaries: The people entitled to receive income or principal from trust assets during the lift of the grantor/settler and upon the death of the grantor/settlor.
A settlor can create a revocable trust by executing a trust document. Then, they must fund the trust by transferring ownership of assets, such as real estate, stocks, or cash, to the trust. A settlor may amend the terms of a revocable trust or even terminate the trust during their life for any reason.
However, once the settlor passes away, a revocable trust becomes an irrevocable trust, and the assets of the trust will be distributed according to the terms of the trust document. For example, the trust document may specify that upon the settlor’s death, the assets in the trust will pass to the settlors children, per stirpes (e.g. in equal shares among the settlers children or if one of the settlor children predeceased the settlor, then the share of that child passes to his or her children.
Benefits of a Revocable Trust
People in Smithtown and the rest of Suffolk County may include revocable trusts in their estate plan to gain various benefits, such as:
- Avoiding probate: Assets in a revocable trust can bypass the probate process after the settlor’s death. In the trust document, the settlor can direct the trustee to close the trust and distribute its assets to the settlor’s heirs. Thus, a revocable trust can distribute inheritances while avoiding the time and expense of probate.
- Managing assets continuously: Although a settlor may initially serve as trustee of their revocable trust, they can also appoint a trustee or designate a successor trustee to manage the trust and its assets. Thus, revocable trusts can eliminate the need for guardianship/conservatorship.
- Providing flexibility and control: Settlors retain complete control over revocable trusts, as they can amend the trust’s terms, change beneficiaries, or dissolve the trust at any time during their life. Thus, a settlor can update their revocable trust in response to changes in preferences, family dynamics, financial needs or changes in the law.
- Safeguarding privacy: Unlike the probate of a will, operating a revocable trust does not involve a public court process. Settlors can maintain privacy in their financial affairs.
Limitations and Considerations
Although revocable trusts have several benefits, they also have limitations compared to other estate planning tools. Some of the considerations that people should keep in mind when evaluating whether to incorporate a revocable trust in their estate plan include:
- No tax benefits: Revocable trusts do not provide income or estate tax benefits because the law considers those assets to belong to the settlor.
- No asset protection: Because a settlor can change or revoke a revocable trust, the law considers the assets in the trust as remaining under the settlor’s full This means that creditors may reach those assets, and the assets are owned by the settlor for Medicaid eligibility purposes.
- Requires proper funding: A settlor must ensure they have legally transferred the assets they wish to place in the revocable trust. Assets that are not transferred may ultimately remain in the settlor’s estate for probate purposes.
Revocable Trusts vs. Wills
People undertaking estate planning may evaluate using a revocable trust versus a Last Will and Testament. Although revocable trusts and wills can serve the same purpose of distributing a person’s assets to beneficiaries after death, they operate in different ways. First, a revocable trust takes effect immediately after the settlor executes the trust document and funds the trust. Conversely, a Last Will and Testament only goes into effect after the grantor’s death. Revocable trusts can continue after the settlor’s death as an irrevocable trust, whereas a Will only remains in effect as long as needed to administer the decedent’s estate. Finally, a revocable trust can pass assets directly to named beneficiaries relying on simply the settlor’s death certificate, whereas distributing inheritances through a Will requires probate.
Most people will include a will and a revocable trust in their estate plan. Wills can serve other functions that revocable trusts cannot, such as appointing an executor for a decedent’s estate or nominating a guardian for the decedent’s minor children. A will can also serve as a backstop for an estate plan. With a “pour over” will, a person can direct the distribution of any assets not transferred to their trust.
Revocable vs. Irrevocable Trusts
Living Trusts fall into two basic categories: revocable and irrevocable. Unlike a revocable trust, a settlor cannot unilaterally terminate an irrevocable trust at will. Instead, an irrevocable trust remains unchanged until the time specified in the trust document for its dissolution. Furthermore, unlike revocable trusts, irrevocable trusts offer benefits such as asset protection and tax advantages. A person may choose an irrevocable trust over a revocable trust when they need the benefits of a particular type of irrevocable trust, such as a Medicaid or special needs trust.
Setting up a Revocable Trust in New York
The process of setting up a revocable trust involves several steps:
- Drafting the trust document, which outlines the terms under which the trustee must manage the trust, names the trustee and successor trustees, and designates beneficiaries
- Executing the trust document as required by New York law
- Funding the trust by transferring assets, such as deeding real estate to the trust, transferring stock to the trust’s name, or putting cash in the trust’s bank account
An experienced estate planning lawyer can help you avoid mistakes when setting up a revocable trust by ensuring an appropriate structure for the trust, compliance with state laws, and valid transfers of assets to fund the trust.
Common Misconceptions in Smithtown About Revocable Trusts
Some of the most popular misconceptions that people in Nassau and Suffolk counties have about revocable trusts include:
- Revocable trusts avoid taxes: A revocable trust cannot shelter income from taxation. Furthermore, the IRS considers assets in a revocable trust as part of the grantor’s estate, meaning those assets count for estate tax purposes.
- Revocable trusts protect assets from nursing home expenses: Assets in a revocable trust may still count as part of an individual’s estate. Instead, only specialized irrevocable trusts can help a person become eligible for Community (home care) or long-term (nursing home) Medicaid benefits.
- A revocable trust eliminates the need for legal counsel: A person who sets up a revocable trust without assistance from an attorney risks making errors that could jeopardize the trust’s effectiveness.
Contact Us in Smithtown Today for Your Estate Planning Needs
A revocable trust can help you achieve your estate planning goals, manage your assets, and provide inheritances to loved ones without the expense of probate. You can learn more about revocable trusts and discuss whether you should incorporate one into your estate plan during your confidential consultation with an elder law and estate planning attorney serving Smithtown and the rest of Long Island. Don’t wait—contact Futterman Lanza, LLP today.
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