This article outlines the uses of revocable trusts in the US.

(This article previously appeared in Family Wealth Report, sister news service to this one. Readers outside North America but who live in jurisdictions affected by the English common law system may find the topic of interest.)

Trusts are an obvious and well-known tool of wealth structuring, but they can sometimes be misunderstood. In the context of the US sector, the revocable trust is a useful structure with specific advantages – and some costs. With tax filing chores very much on the minds of individuals right now on both sides of the Atlantic, this is a suitable time for revocable trusts to be the subject of expert analysis. Someone well qualified to do this is Ethan McKenney, senior wealth management consultant for Manning & Napier, a Rochester, NY-based investments and consultancy firm. The article first appeared on the Manning & Napier website and is republished here with permission. The editors are pleased to accept these comments and invite readers to respond.

Wills and revocable trusts are estate planning tools which can be used to pass assets on at death. However, the structure of wills and trusts are quite different. In order to understand how both a will and trust work, you must first understand the probate process.

In very broad terms, a will determines where all probate assets pass at death. In general, a probate asset is any asset that is not held in trust, not jointly held, and that does not have a beneficiary designation attached to it. Stated another way, any asset that does not already have a mechanism/form that states where it passes will often pass based on a will. A will can either transfer assets to a person, organisation, or even into a trust (including a revocable trust).

In contrast, a revocable trust is a document that determines how assets are distributed while the owner (trustee) is alive and where the assets pass once they die. A revocable trust avoids probate for any asset that is titled in the trust at death, although the trust can receive assets through a will (i.e., the will can leave assets to a revocable trust in order to follow the terms of the trust).

Common reasons a person does not set up a revocable trust are because the process tends to be more expensive and more time consuming than setting up a will. (Note: The process can be more time consuming because you must transfer the ownership of each asset into the trust.) In order to understand if a revocable trust is an appropriate solution that is worth the time/cost to implement, you must understand the key reasons that people choose to establish trusts. Common situations in which a revocable trust may be appropriate include:

- If you plan on naming beneficiaries who aren’t family members. Family members could be sensitive to this and could choose to pursue legal action. In general, revocable trusts are not public documents and are harder to contest in court than wills; 

- If you own real estate in more than one state. Many people will own property in more than one state of the US (e.g., vacation homes). Estates are probated in each state in which real property is located. However, a revocable trust can help to ease this issue, since any property held in a trust can avoid a second probate proceeding outside of that owner’s state of residence.

- If you want to keep your asset list and distribution private. When a person dies, probate assets and their applicable distribution are viewable by the public. Assets that are in a revocable trust avoid probate. Thus if you wish to keep your asset transfer private, a revocable trust may be appropriate; 

- If you are concerned about the continuity of asset management. A revocable trust is a good way to ensure that assets continue to be managed in line with the trustee’s goals and desires. Specifically, a trust names both a successor trustee and highlights the distribution methods of the trust (which in turn highlight income needs and access to principal). In contrast, without a revocable trust, assets may be frozen and/or may go a period of time without adequate management as the estate settles.

There are multiple scenarios you may find yourself in where it could be beneficial to have your assets in a revocable trust, with just a few common ones listed above. Determining whether a revocable trust or a will is appropriate is just one piece of the estate planning puzzle.