Revocable Trusts for Changing Times
Things change—often in unexpected ways. This axiom has certainly been true for estate planners, who have juggled near constant adjustments to state and federal laws over the last 10 years. The frequent movement of individuals and the evolution of the very nature of assets also conspire against well-meaning planning. It is no secret, then, that trust instruments need flexibility. How to do that depends on the circumstances of each client. Greater wealth and complexity may augur long-lasting trusts, while less wealth and less complexity may inform a simpler plan. Regardless, the need to be nimble is paramount. Many of the tools to do this are well known. Therefore, rather than break new ground, this article serves as a brief reminder and reexamination of options, focusing on planning for spouses.
For purposes of this article, a revocable trust is always the foundation of an estate plan. While revocable trusts have frequently been touted as a means of avoiding probate and doing so may be important in some states (like California), focusing on probate avoidance sells revocable trusts short. Their true benefit is as a means of managing finances during life and, critically, during incapacity. Because the client will be alive for the potential trauma of a personal conservatorship or guardianship of the estate, using a revocable trust to avoid those proceedings can spare the client from actual personal harm. Failing to use a revocable trust for incapacity planning purposes is often a missed opportunity.
Simple Revocable Trust
Even clients with limited means need the principal benefits of a simple revocable trust. A trust can provide a means of financial management that is not available in any other legal form in most states. For example, aside from the conservatorship avoidance, financial institutions tend to be more comfortable with trusts than powers of attorney, and they seem to have an easier time with a change of trustee when the terms of the trust instrument are clear about who is to serve and when. Trust property is also not the subject of probate at the death of a settlor, though the informal probate procedures of some states, such as those adopting the Uniform Probate Code, are less burdensome than the probate proceedings in other jurisdictions, such as California. Because the location of clients and property at the time of death can be difficult to predict, however, it is equally difficult to predict where a probate may be necessary when the client dies.
At the death of the first spouse, a simple revocable trust structure can essentially provide that nothing changes either by granting the survivor revocation and amendment powers over the trust, as in the case of a joint trust, or pouring the trust into the survivor’s own revocable trust. Thus, the structure also allows for a streamlined administration at the first death.
Although a simple revocable trust provides the needed incapacity and probate planning, there are several drawbacks. First, the structure lacks control. To the extent that one spouse is interested in controlling the use of their property after their death, that is not an option with a simple revocable trust.
Second, the revocable and amendable nature of the trust holding the deceased spouse’s property leaves the survivor vulnerable to influence. Exploitation is a significant concern with a simple revocable trust because, unless another party serves as trustee, the trust assets are essentially the survivor’s personal assets. Thus, the simplicity of the trust leads to reduced barriers that can be exploited if the survivor becomes susceptible to others.