Why Might You Want a Revocable Trust?
One of the most commonly used estate planning tools is a revocable trust, which is usually created together with what is called a "pour-over will." You create the trust by signing a trust document that names a trustee and by transferring assets to the trustee. The trust can be amended or revoked at any time prior to your death or disability. You can name yourself as the trustee and can give yourself the same control over the trust assets that you would have if you continued to own them directly. For the most part, for both income tax and estate tax purposes the assets of the trust are treated as if they were your assets. But for probate law purposes, at the time of your death the assets are owned by the trust, not by you. Since you don't own the assets, they are not part of your probate estate.
Provided that you fund the trust (see below) and see to it that your probate estate qualifies for small estate treatment under probate law (that is that the value of assets held outside the trust is not more than $50,000 in Indiana, $100,000 in Illinois, with the further proviso for Illinois that the probate estate not include real property), you can avoid probate proceedings. The pour-over will transfers to the trust the remaining property that you held outright at the time of your death. You can thus give the trustee control of all your assets to be dealt with as specified in the trust document.
Funding the Trust
Your lawyer can draft a trust document that is tailored to your situation and can see that it is duly signed, but that is not the end of the matter. For the revocable trust to accomplish its purposes it must be funded. That means transferring assets into the name of the trust. You can take care of most of these transfers yourself, but it takes perseverance. Your lawyer can do it for you, but that will be an expensive use of the lawyer's time. Experience shows that the task of funding the trust is one that often goes undone.
Immediate Control of Assets
If the trustee is someone other than you, then the trustee simply continues to act after your death so there need be no delay in the business of administering the trust. If you are the trustee, then at the time of your death the trusteeship passes to a successor trustee in accordance with the trust document. The way that the typical trust is drafted, the succession occurs automatically. That means that the successor trustee, armed with a copy of the trust and a death certificate, can gain immediate control of trust assets.
In contrast, probate proceedings take time. Before the personal representative can act he or she must apply to the probate court for what are called "letters testamentary" if there is a will ("letters of office" in Illinois), "letters of administration" if there is no will. This is likely to take some weeks, perhaps a month, perhaps longer. How quickly assets of the estate can be distributed depends on the particulars of the estate and the extent to which there is conflict among various interested parties. The personal representative needs to have an overview of the assets of, and the claims against, the estate before he or she can safely distribute assets to anyone. That means that the more clear it is that there will be significant assets remaining for distribution after paying all legitimate claims (including tax claims and administrative expenses of the estate) the more likely it is that the personal representative will be able to distribute some assets earlier rather than later. As a general rule there will be more delays built into the probate process than there would be with an equivalent trust. It all depends on the particulars of course, and even a trust can get bogged down in disputes by competing beneficiaries.
Privacy
A revocable trust is essentially a private arrangement. The existence and contents of the trust document will be disclosed to some private actors, but this can be done in confidence. The trust will also be disclosed to tax authorities, but, while there have been some recent notable lapses by the IRS, there is still some reason to hope that, going forward, government authorities will live up to the strict taxpayer-confidentiality rules that apply to records turned over to them. The records of probate proceeding are, in contrast, public records. Anyone who wants to look at them for whatever reason is free to do so, except in extraordinary circumstances.
Disability
If you should become disabled and unable to manage your affairs, having a revocable trust already in place provides a solution that has advantages over the alternatives in many cases. The trust can provide that upon a disability of the grantor (that is, you, in our example) the trusteeship passes to a successor trustee, who then has power over trust assets as spelled out in the trust. An alternative arrangement is a durable power of attorney: a power of attorney that continues to be valid when the principal becomes disabled. With a revocable trust the trustee's control of the assets is not interrupted by the death of the grantor. In contrast, the power to control assets under a durable power of attorney terminates with the death of the principal. Moreover, in my experience, convincing transactional counter-parties that a person has authority to act as a trustee is easier (less time consuming, requiring less jumping through unnecessary hoops) than the equivalent under a power of attorney.
Real Property in Another State
If you own real property in a state other than the state of your legal residence at the time of your death, your estate will have to initiate probate proceedings in that other state in order to pass title to the property. Such proceedings will be unnecessary if you have passed title during your lifetime to the trustee of a revocable trust.
Fending Off Challenges
A revocable trust is, as a practical matter, more difficult to contest than a will. Because the trust document is not a public document a party wishing to challenge the trust will first have to overcome the hurdle of obtaining access to the trust document. Moreover, a trust that has been funded and has been operating for some time is likely to carry with it a certain presumption that it was created by someone in control of his or her faculties and acting on his or her own volition.
Complex Family Arrangements
Sometimes spouses will decide that they wish to enter into a mutual arrangement according to which each agrees that the wishes of the first to die should be binding with respect to the ultimate distribution of that person's property, while at the same time putting that property to work supporting the surviving spouse during his or her life. This may be especially attractive for a couple in which each spouse has, for example, children from a previous marriage. The couple might agree that the assets of the first to die be used to support the surviving spouse but then be distributed to the children of the earlier marriage of the first to die. The revocable trust is an effective instrument for crafting a flexible solution.
Cutting Off Claims—Or Not
One benefit of probate proceedings, which can be extremely important in certain cases, is that claims against the estate are cut off after a relatively short time. Claims against the estate may be cut off within a matter of months, but in any case claims are cut off one year after the death of the decedent in Indiana (two years in Illinois). Assets that are distributed through the probate process—to heirs (those who take when there is no will) or devisees (those who take under a will)—should not be reachable by would-be claimants against the estate whose claims have been barred. Beneficiaries under a trust may be more susceptible to having their assets reached by would-be estate claimants. For this reason, those who have particular concerns about lingering liability (professionals such as doctors and lawyers often find themselves in this position) may want to consider opting to go the probate route.
Choosing a trustee
In most cases the grantor of a revocable trust designates him or herself as trustee and remains in that role until death or disability, at which time the trusteeship passes to the successor trustee according to the terms of the trust document. For anyone contemplating the creation of a revocable trust, deciding who the successor trustee should be is a matter of great importance. High net worth trusts can afford to pay for professional trust management. For a low net worth trust a possible solution is to name a trusted friend or family member who has the willingness and the necessary skills to do the job. The trustee must be responsible, organized, and wise enough to recognize when advice should be sought from experts such as lawyers, accountants, and investment advisors.
What's the Bottom Line?
Whether or not the advantages of the revocable trust outweigh the advantages of going the probate route can only be determined on a case by case basis. While the revocable trust will cost more up front to put in place, in the long run it is often cheaper than the costs of probate. I have tried to give the matter a full enough discussion here and at Should You Try to Avoid Probate? so that you will know what I mean when I say that the decision depends in a very real way on the particulars of your situation and, to some extent, on matters that only the future will reveal.