Revocable Trust – 2011 and 2012 Update

When Do You Need a Revocable Trust?

(Updated for 2011 and 2012)

                       You may have been told that you need to protect your assets by placing them into a “trust”.  While there are many types of trusts, it is the most common is a revocable trust, which is also sometimes referred to as a “living trust”.  In basic terms this trust is a tool pursuant to which a person, during their lifetime, may transfer assets into a trust which will then be distributed to his or her family or lawful heirs at the time of death.

Revocable trusts are powerful tools which may accomplish a variety of goals including reduction of the Estate Tax, avoidance of probate, and the protection of assets.  Determining whether the Estate Tax may apply involves an analysis of the applicable exemption provided by Congress.   For 2011 and 2012, the applicable exemption is approximately $5 million ($5,120,000  in 2012).  This means, generally, that anyone who dies in those years can declare up to $5 million in assets free from the Federal Estate Tax.  On January 1, 2013, the exemption will fall back to $1 million, subject of course to additional action by Congress.  Some experts predict that the exemption rate may eventually stabilize at $5 million, adjusted by the rate of inflation.  However, it is important to remain aware of the applicable exemption as your potential Estate continues to grow during your lifetime.

Any amount left in your estate (including proceedings from life insurance) minus the applicable exemption for the year of death, are potentially subject to the estate tax.  A trust does not avoid the estate tax, but does allow a married person to likely reduce the tax effect upon his or her spouse through proper use of a Bypass Trust (which generally allows both married parties to claim the exemption, separately).

Since the $5 million exemption presently excludes most estates from the tax, the more popular justification for forming a revocable trust is to avoid probate – the sometimes costly and lengthy legal process generally necessary to administer the estate of a person upon death.  Many probate lawyers will charge your family a percentage of the assets which pass through the Estate, regardless of the amount of work which may be necessary to complete the probate.  A typical Probate will take 6-12 months to complete, often limiting the ability to access assets during the completion of the proceedings.  If assets are property titled in name of a Trust, then upon death those assets avoid probate entirely.  Further, since probate records are available to the public a trust provides the additional benefit of privacy.

Trusts may also provide a limited measure of asset protection for the family or heirs of the deceased person.  By including a “spendthrift provision” in the trust, creditors of the beneficiaries may be prevented from reaching the assets placed in the trust.  This might also be used to prevent a younger heir from reaching the full amount of his or her inheritance, which can also be accomplished by placing an age limit on the date of distribution.

There are other benefits to creating a revocable trust, such as avoiding potential issues which may arise upon a future physical or mental disability and the benefit associated with allowing your family to retain control over your assets upon death.  The largest advantage, however, may be the peace of mind associated with knowing that your wishes upon death are specifically, properly organized and detailed in a manner causing the least amount of potential stress and difficulty upon your family or heirs.  For additional information on how a trust may benefit you and your family, please contact Cade Cox of Cox, Sterling & McClure at 501-954-8073 or at clcox@coxandsterling.com.