A revocable trust is a type of trust that can be modified or dissolved by the trust creator (the “grantor” or “settlor”). They differ from irrevocable trusts, which cannot be changed except by unanimous agreement among the beneficiaries.
While they do not offer as many potential advantages as an irrevocable trust, revocable trusts provide peace of mind since the grantor does not lose control of their precious property. These legally recognized entities also have many powers of their own, which collectively ensure that assets are managed and distributed according to the wishes of the grantor — even if they die or become medically incapacitated.
Perhaps most beneficial of all, all assets placed in a trust created during the lifetime of the grantor will avoid probate. This arrangement reduces the time and expense of managing your affairs after you pass on while creating more customization for distributing your assets compared to a will.
Talk to a New Mexico revocable trust lawyer if you feel like these are benefits you would like to have as part of your estate plans. You can reach New Mexico Financial & Family Law at any time to schedule an appointment with an experienced attorney when you call 505-503-1637 or contact us online.
A will is a necessary document, and there are many important considerations when it comes to drafting one. However, wills have one major shortcoming: they only come into effect after you die.
While nothing is ever guaranteed, families thinking about estate planning may want to create more certainty about what happens after their loved one passes on. A revocable trust can accomplish just that.
Not only can a revocable trust create special rules for what happens to property, but they are also created during your lifetime. You have the opportunity to see how the management of the trust plays out in real-time.
You can also have trustees available to step in the moment they are needed — whether because you have become medically incapacitated or have passed away.
All of these abilities give a revocable trust much more power than a will. What’s more, they can help portions of your estate bypass probate, lessening the responsibilities of your estate representative while keeping your family assets private.
Reach out to a New Mexico revocable trust lawyer to discuss these advantages and your options for creating a one-of-a-kind estate plan.
A revocable trust is formed when a grantor transfers property they own into the trust. The grantor appoints a trustee and names beneficiaries who will receive transfers from the trust at a specific time.
With most revocable trusts, the grantor retains the right to access the contents of the trust and to modify the trust’s structure or rules at any given time. They are also likely named as the sole trustee or a co-trustee.
In a way, a revocable trust can be thought of as a savings account and a will in one, except in this case, the account technically owns the property. Revocable trusts also operate similarly to a corporation in that they can self-manage using rules and instructions, usually with a succession of possible trustees available in the event one can no longer perform their duties.
Upon the death of the grantor (or all grantors, if there are multiple), the trust becomes irrevocable. The trustee will have instructions to continue managing the trust.
They will also begin distributing property from the trust if their instructions tell them to do so immediately upon the death of the grantor.
The trustee may also be instructed to keep some — or all — of the property in the trust for a period of time. During this period, the contents of the trust can earn income, such as through stock dividends or rent from real estate.
A trust can pay out proceeds from this income to beneficiaries for a stated period of time.
Eventually, though, the trust must dissolve (this may take multiple generations in the case of a dynasty trust). At this point, the remaining contents of the trust will be distributed to named beneficiaries or other appropriate parties in line with the original guiding instructions of the trust.
Unlike a will, where property typically is distributed immediately after probate, a trust can retain property designated for a beneficiary until certain conditions are met.
For example, the trust can state that a minor will only receive property once they reach the age of 18 or 21. The trust can even require that a beneficiary meet certain conditions, such as assuming guardianship of a minor before they receive any distributions.
As mentioned, trusts can pay income (sometimes called an annuity) to a beneficiary instead of transferring the principal property. For example, a stock paying a dividend can cause a beneficiary to receive a monthly stipend while the stock itself remains unsold in the trust until other conditions are met.
Usually, trusts are funded with income that is already taxed — or assets purchased with post-tax income. Any income generated from the trust’s contents can be reported as income for the grantor, even if the accumulated value remains in the trust.
At the time of the grantor’s death, the IRS will charge an estate tax based on the final estimated value of the trust’s contents.
One piece of good news is that any appreciable assets will have their principal value “stepped-up in basis” to reflect their value at the time they are inherited. Since the principal value is usually set to the value at the time of purchase, this adjustment effectively erases some of the capital gains that the recipient would eventually have to pay after the asset was sold.
Beneficiaries who receive income from the trust will have it taxed as if they were their own income. Any transfers guaranteed to the beneficiary will count as a gift and be taxed accordingly.
Multiple parties can all contribute property into a single trust. This practice is most common with married couples, but it can also be used by families or even business partners.
However, because grantors usually retain some degree of control over the entire trust, this situation could invite misuse or tension among partners. The risk of disagreements means that a shared revocable trust should only be used when all parties are clear about expectations and confident that they will be met.
Because a trust technically removes property from the estate of the grantor, that property will not be considered during the probate process.
Probate occurs when someone dies, and their estate is processed through the court system. During this process, the validity of the will is assessed, and the representative of the estate has to pay off all administrative expenses.
In addition, beneficiaries and other parties can raise claims to the estate, including creditor claims. Only after all claims have been resolved can the estate representative distribute the remainder of the property, according to the decedent’s will.
There will be a public disclosure of property processed through probate, as well.
When property is placed in trust, it can avoid the probate process. That means its contents are kept private, and the trustee does not have to wait for probate to complete before assets are distributed.
Further, businesses with equity stored in the trust can continue operating without any administrative questions, whereas a business interest may need to be sold if it is considered to be part of the decedent’s estate.
In a similar fashion, houses being used by rental tenants or family can continue to be occupied. If the house was probated instead, it may be possible that the estate representative would be forced to sell the home, liquidating its value so that a cash equivalent could be distributed among heirs.
In this way, trusts ensure a seamless transition after your death, with less intrusion into the lives of your loved ones.
While the grantor is welcome to assume the role of primary trustee, they should consider appointing a co-trustee or naming a successor trustee in the event that they die or become medically incapacitated. This trustee should be someone different than the representative of their estate, ideally, and they should be made familiar with the trust’s arrangement before they are required to act as the sole trustee.
A trustee can be anyone you feel you can depend upon, including another family member or a close friend. In many cases, though, a trustee is a professional services provider, such as an attorney, accountant, or financial advisor. An organization can also be named as a trustee, including a bank, law firm, or accounting firm.
After you die, you can elect to have a trustee oversight position assigned to an individual or organization. This overseer requires the trustee to report to them, and they will monitor the activities of the trustee for the duration of the trust’s existence.
If the trustee overseer determines that the trustee is not acting in the interests of the beneficiaries, they can have the trustee removed and nominate another trustee to be appointed.
Whether a person or an organization, a trustee can also run into unexpected challenges, die, or dissolve as a company. With this risk in mind, the grantor should ideally name a successor trustee or provide an oversight role with criteria for selecting an appropriate successor.
All revocable trusts become irrevocable upon the death of the final grantor. The trust can be structured in a way that it will convert to another type of trust when this happens.
Many times, this conversion is accomplished by transferring all assets held in the trust to a new trust — a process called “decanting,” because it is similar to pouring wine from a bottle into another vessel.
Common examples of trusts that a revocable trust can convert into are outlined below.
These trusts are used by married couples. When one spouse dies, the trust splits into two halves:
The surviving spouse usually has limited access to the B trust, which prevents a situation where intended heirs don’t inherit anything from the spouse who died first. They may have full access to the A trust or just derive income from it.
Alternatively, the surviving spouse could be given a life annuity from the proceeds of the B trust, which would make it a qualified terminable interest property (QTIP) trust. This arrangement allows the deceased spouse to qualify the trust as a marital gift while still designating the property to the eventual beneficiaries.
A revocable trust can become a charitable trust upon the death of one or more grantors. The new trust will pay some of its contents to beneficiaries and some to a designated charitable organization.
A split-interest trust creates a charitable trust with some of its assets and a private trust with the rest.
Note that the IRS does not recognize the charitable status of a trust converted after the grantor’s death until a reasonable period of settlement has passed.
Creating a revocable trust is a serious decision, but it’s one you can start thinking about today. Also, unlike irrevocable trusts, they can be modified and customized after they have been created, so there’s no reason to delay trust formation if you already know that there are opportunities available to take advantage of.
Come to New Mexico Financial & Family Law to discuss your options for trust formation. We may recommend a revocable trust if your goals align with the benefits described above or an irrevocable trust if you instead want asset protection, more tax exemptions, or other benefits.
Schedule your discussion with a New Mexico trust attorney today when you call 505-503-1637 or contact us online.
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