Revocable Trust Benefits Redux

Take-Away: Sometimes we forget why the use of a revocable grantor trust is a critical part of an estate plan. Several practical, financial and creditor advantages exist to the use of a revocable Trust over a Will went the transfer of wealth occurs on an individual’s death.

Background: A draft Will crossed my desk this past week which had me wondering if the lawyer knew what he was doing. (I will give him the benefit of the doubt, but still…..) The clients had an estate of about $20 million, and the lawyer had placed the clients in reciprocal Wills, with substantial distribution directions on the death of the surviving spouse. Not only was the clients’ estate large, it was also spread across three states, with real estate held in Michigan, Florida, and the Chicago.  I thought it wise to provide a refresher on a revocable trust is often encouraged over a simple Will the individuals.

Benefits of a Revocable Trust:

1. Preserve Confidentiality: This is the obvious benefit to the use a revocable Trust. The assets titled in the Trust’s name at the time of the settlor’s death avoid probate. The Will must be filed with the probate court and be formally admitted to probate. Thus, the Will becomes a matter of public record. The revocable Trust does not get filed with the probate court, unless there is some form of litigation over the Trust or formal directions are sought by the trustee. If an individual’s estate plan has some sensitive provisions, e.g. a grandchild’s inheritance is to be held in trust to pay for the grandchild’s substance abuse treatment, then those personal family matters remain confidential if they are included in a Trust document, not so if  they are contained in a Will that becomes a public document. Similarly, if the fiduciary is directed to sell a major asset owned by the decedent, it is much better to provide those directives to sell an asset in a Trust, and not a Will;  potential buyers would become aware of the asset’s value  through an Inventory that must be filed with the probate court, and the corresponding obligation on the personal representative to sell the decedent’s assets would become public and thus potential buyers will alter their offers of purchase based on that knowledge (value + obligation to sell.)
2. Avoid State Inventory Fees: Most states impose a fee of some sort to probate an estate, even if the personal representative has little or no interaction with the probate court itself. Often the fee is based on the value of assets that comprise the decedent’s probate estate. If the decedent’s assets are titled in the name of the decedent’s Trust, the value of those assets are not included in the probate estate, thus lowering, or avoiding completely, the state’s Inventory probate fee. Some state probate court fees can be pretty high. For example, the Delaware probate fee is 1.75% of the decedent’s probate estate’s assets- a $10 million probate estate would trigger a $175,000 probate court fee. Avoiding this fee is often cited by attorneys when they describe the advantages of a client using a Trust over a  Will; while the Trust may cost the client a bit more than the simple Will, the Inventory fees saved using the funded Trust more than off-set the additional cost to prepare the Trust.
3. Avoid Ancillary Probate: If the decedent owned assets in two separate states there will be the need for two separate probate estates to be opened, one in the state where the decedent was domiciled, and a second in the state where the decedent owned the other assets, particularly real estate. Two admissions of a Will to probate, two separate probate proceedings, two separate Inventory fees to be paid, two sets of lawyers to  monitor and herd (and pay!), more reasons for delays in completing the probate process awaiting court hearings etc. If the decedent’s Trust held title to the real estate, then there would be no reason to open a probate estate in either of the other state. In short, when there are out-of-state assets, that is reason enough to use a Trust instead of a Will to hold title to those assets, simply to avoid the need to open an ancillary probate estate.
4. Avoid Invitations to Interested Parties: If a Will is to be probated, many states, including Michigan, require that notice be given to interested parties. This would include heirs-at-law who would inherit from the decedent if he/she died intestate, i.e. without a Will. This can become awkward if notice must be served on the decedent’s child who was born out of wedlock, when no one knew the child existed. It can also be problematic if an heir is a minor, since the probate court will have to appoint a guardian ad litem for the minor heir. While a copy of the Trust must be served on all qualified trust beneficiaries (present and contingent) the group that receives notice of the settlor’s death and a copy of the trust instrument is much smaller as a generalization than interested parties. If all ‘heirs-at-law’ must receive notice of the offer of the decedent’s Will to probate, that may mean that an expensive search may have to be made to identify all heirs (interested parties) who are entitled to notice and the opportunity to be heard in the probate proceeding, i.e. more delay, more expense, more uncertainty that some distant relative may ‘go rogue’ and file a challenge to the validity to the Will. This notice obligation on the personal representative of a decedent’s probate estate  is akin to the old Price is Right television game show, where individuals are invited to ‘come on down and file a challenge to the Will’ a process that unfortunately tends to encourage probate litigation; the interested parties are ‘invited’ to file claims against the decedent’s Will. All of that drama can be avoided with the use of a Trust.
5. Avoid “Mother May I’s ..?”: Some states require court approval of many decisions that the personal representative may have to make in administering the decedent’s probate estate, e.g. sell an asset, settle a claim against the estate, make a partial distribution of estate assets, etc. To heirs this seems like an endless string of meaningless trips to the probate court, expensive lawyer in tow, to ask the probate judge ‘may I do the following…?’ when everyone knows in advance that the judge will grant permission.  All these ‘mother may I’s’ can be avoided with the use of a Trust, since the trustee normally does not act under the supervision of the probate judge. Again, less expense, fewer trips to the probate court, fewer delays, etc., using a Trust in lieu of a Will.
6. Avoid Restriction on Fiduciaries: Let’s say the decedent wants his accountant to serve as fiduciary of his estate on death. Some states, like Florida, have restrictions on who may serve as personal representative of a decedent’s probate estate. In Florida, a personal representative must either be a relative of the decedent, or a Florida resident. If the decedent’s accountant is practicing in Michigan, he cannot serve as personal representative of the decedent’s Florida probate estate. But if the decedent had used a Trust instead of a Will, his CPA could serve as successor trustee of the decedent’s Trust. Nor would the CPA have to post a bond to serve in that fiduciary role (yet another expense than can be avoided using a Trust.)
7. Avoid State Income Taxation: Most,  if not all,  states treat a probate estate as a resident for state income tax reporting  purposes if the decedent was domiciled in that state. Different states have different ways to determine when a Trust is treated as a resident Trust for the imposition of state income taxes. Some states look to where the settlor or testator was domiciled when the Trust became irrevocable. Even if the settlor was domiciled in the state when the Trust became irrevocable (e.g. on the settlor’s death), some of the states will not impose an income tax  on a Trust if there are no continuing connections to the state, such as the presence of a trustee, real or tangible personal property, or income from sources in the state. Other states will provide this exemption but only to an inter-vivos Trust but not a testamentary Trusts that is a part of a decedent’s Will. Thus, it is possible to locate a Trust in a jurisdiction where no income tax will be imposed, which will not be the case with a probate estate associated with the decedent’s Will.
8. Settlor’s Lifetime Protection: As individuals age they are more prone to be preyed upon by others. With a Will, arguably there is no one standing between the individual and the predator who wants access to the elder or vulnerable individual’s assets. With a funded Trust, arguably the trustee that holds title to the assets is in a much better position to detect those elder abuse or financial exploitation efforts and intervene to protect the Trust’s settlor. This can be important if the individual’s children live far away and are not able to regularly monitor their elder parent’s financial affairs, who will have far more comfort if an independent trustee is involved in managing the assets.
9. Beneficiary Protection: One little known law is that if a beneficiary receives an inheritance or distribution from a decedent’s estate (via a Will), and that beneficiary files for bankruptcy within 180 days of the death of the heir from whom they received their inheritance, bequest or devise, the entire amount ‘inherited’ is included in the beneficiary’s bankruptcy estate and used to pay their creditors. In contrast, if the inheritance passes to the beneficiary through a Trust that becomes irrevocable upon the death of the settlor, then the assets received by the trust beneficiary are not considered to be a bequest or devise, and thus those assets are not includible in the trust beneficiary’s bankruptcy estate and used to pay the beneficiary’s creditors . This is a big difference between receiving an inheritance coming from a probate estate (i.e. a Will) and from a Trust- under the Will, the beneficiary loses their inheritance, while the distribution from the Trust cannot be taken to pay the beneficiary’s creditors.

Conclusion: These are just some of the obvious benefits that arise from the use of a revocable grantor Trust as the primary source of an estate’s distribution. Why the lawyer who drafted the proposed Will’s felt there was little benefit to the use of a revocable Trust is a mystery to me. While clients often object to the complexity of a Trust, and feel exploited that they are paying the lawyer ‘by the word’ for a multipage Trust instrument that is produced, taking the time to explain the benefits of the Trust over a simple Will is worth the effort, and in the end, will save the client’s heirs a lot of expense and headache.