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Effectively Managing Revocable Trust

By:  Sandra L. Clapp, Esq.

Trusts of various forms have become common planning tools for lifetime administration of assets, testamentary distributions upon death, asset protection, and gifting.  A trust is generally established by the person who creates the trust (a grantor or trustor) and the person who administers the trust (the trustee) for the benefit of identified persons or charities (the beneficiaries).  A trust is generally formed by the grantor and trustor signing a trust agreement or declaration of trust that directs the administration of the trust. 

For most individuals, planning is effectively accomplished through a “revocable” trust.  In a revocable trust the grantor normally retains the power to modify, amend or alter the provisions of the trust during his or her lifetime.  It is common for the grantor to also serve as the trustee of the revocable trust so long as he or she is able.  A will (known as a “pourover will”) is also prepared to ensure that any assets that are not in the revocable trust on death of the grantor are distributed through the trust.  Any asset that is properly titled in the revocable trust will generally not be part of a probate proceeding upon death of the grantor.  The ultimate effectiveness of the revocable trust will depend upon how well it is managed during the grantor’s lifetime.  An “irrevocable” trust is one that generally cannot be revoked or substantially changed once it is established and may have significant income, gift or estate tax implications and is not the focus of this article. 

If the grantor is serving as trustee of the revocable trust, all trust accounts or financial affairs can generally be conducted under the Social Security Number of the grantor.  Once the grantor dies or is no longer serving as trustee, a separate taxpayer identification number must be obtained from the Internal Revenue Service to be used for all accounts or financial affairs of the trust.  During the lifetime of the grantor, the income tax implications of the trust (income, expenses, deductions, or credits) are reflected on the individual income tax return of the grantor.  Upon death of the grantor, the trust may be required to file a fiduciary income tax return.

To be most effective, a revocable trust should hold title to real property, investment accounts, certificates of deposit, most business interests (excluding S corporation stock), and other titled assets.  To transfer title to real property, a deed must be executed and recorded.  In transferring a primary residence to a trust, an affidavit must be submitted to the county assessor to retain the homeowner’s exemption for real property taxes.  It is not enough to complete a transfer of assets to the trust merely by listing the assets on a schedule to the trust.  For retirement accounts or tax-deferred assets, the beneficiary must be carefully identified to minimize income tax on the distribution.  There are complex rules regarding naming a trust as beneficiary of retirement assets and it is generally not advisable to name the trust as a beneficiary of tax-deferred assets without professional guidance.  If a revocable trust is part of your plan, it is recommended that you periodically review not only the overall trust terms, but confirm that all assets are properly titled or coordinated with the provisions of the trust.

This article is not intended to replace legal advice applicable to your situation and should be used only for informational purposes.  As each set of circumstances is unique, please do not rely upon this information without seeking qualified assistance.

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