Can a living trust help protect your financial affairs?

We’ve all heard stories about how long the courts can tie up an estate in
probate or the potential for high costs and professional fees. In recent years, there has been a significant trend among the various states to simplify the probate process; yet avoiding probate continues to be a topic of keen interest − and the tool often used to avoid probate is a living trust, also known as a revocable trust.

What is a revocable trust?

A revocable trust is simply a trust that gives you the ability to change the terms of the trust or to revoke the trust entirely at any time. This is the main difference between a revocable trust and an irrevocable trust (which can be created for certain gift or estate tax planning benefits during your lifetime or at death). Typically, a revocable trust will allow you to receive all of the benefits of the trust assets (the trust income and the right to use trust assets) as you choose during your lifetime. Following your death, the trust assets are distributed in the manner you’ve directed through the trust terms.

Should you use a revocable trust instead of a will?

The short answer is no. When a revocable trust replaces your will as the centerpiece of your estate plan (with provisions on how to distribute your assets following your death), the trust is still not a complete substitute for your will. Even with a revocable trust, it is critical that you still have a will for the disposition of any assets you did not transfer to the trust during your lifetime, as well as for designating an executor (or personal representative) and a guardian for any minor children.

When does using a revocable trust make sense?

While a revocable trust may not be desired for all of your assets − perhaps because the probate process in your state is simple enough to use a will as your primary estate planning document, it may still make sense under the following considerations:
  • Transferring out-of-state assets to a trust to avoid probate in other states. If a revocable trust holds any real property you own in other states, then your estate avoids a separate probate proceeding in the other states following your death.
  • Managing assets if you’re incapacitated. If you become incapacitated, any assets previously transferred to your revocable trust will continue to be managed for your benefit by your trustee (or successor trustee) without additional costs or interruption. Unless you’ve executed a durable power of attorney that covers all assets, any assets not placed in your revocable trust would require a court proceeding (and possibly ongoing court supervision) to authorize someone to manage your assets on your behalf.
  • Privacy of your assets. Your will and the inventory of your assets in probate are usually available to the public. Anyone interested in your estate (for business or creditor reasons, or simply out of curiosity) can find out what assets are in your estate and who will receive them. Revocable trusts offer a privacy feature because the assets held in your trust pass outside of the probate process.

What are the estate tax considerations?

Transferring assets to a revocable trust will remove those assets from your estate for state probate law purposes, but not for federal (or state) estate tax purposes. For estate tax purposes, the value of your “gross estate” will determine the amount of estate tax due at your death. Since you retain the right to alter your revocable trust at any time, there are no estate tax planning benefits inherent in using a revocable trust.
If your estate is large enough to be subject to estate taxes (typically, if your assets exceed your remaining estate tax exclusion amount − now at $5.49 million for 2017), your estate plan may include some form of tax planning –often involving marital, credit shelter and other forms of irrevocable trusts. This type of tax planning can be accomplished through the terms of a will or revocable trust.
Regardless of whether you use a will or revocable trust as your primary estate planning document, you should also make sure to coordinate the beneficiary designation for your retirement plan assets with these documents.
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The TIAA group of companies does not offer tax or legal advice, or create and prepare legal documents associated with estate plans. Examples included herein, if any, are hypothetical and for illustrative purposes only. Please consult your tax or legal advisors.

Advisory services provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, Member FINRA and SIPC, a registered investment adviser.

©2018 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, 730 Third Avenue, New York, NY 10017

This material is for informational or educational purposes only and does not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made in consultation with an investor’s personal advisor based on the investor’s own objectives and circumstances.