People often ask whether a revocable trust — one that can be revoked or amended — can help save taxes. Sometimes people even tell me directly they need a revocable trust to help them save taxes. While this is not entirely off-base, it is a common misconception.
A revocable trust can incorporate planning that saves estate taxes and income taxes, but a revocable trust, in general, cannot really save an individual any more taxes than a will that incorporates the same types of estate and income tax planning.
So what does a revocable trust do that a will does not? The primary advantage to using a revocable trust rather than a will as your primary estate planning document — i.e., the document that says to whom you want your property to pass at your death — is that you can avoid probate at your death by using a revocable trust. On the other hand, a will is designed specifically for probate (probate means “to prove” in reference to a will’s validity).
When someone dies owning property in his or her name, without a joint tenancy, and without a beneficiary designation, the only way that property can be passed on to the heirs or chosen beneficiaries is through the probate administration process in the proper court. If the person has a valid will, the will controls how the property in the individual’s name (“probate estate”) is administered and to whom it passes. If the individual does not have a will, his or her probate estate passes by intestacy statute — in other words, the state legislature has written his or her will for them.
Property that is titled in the name of a revocable trust, however, is not considered individual property for probate purposes and thus does not have to be reported or administered in a probate court. A key to avoiding probate with a revocable trust, then, is to make sure that you not only create and sign your revocable trust, but that you properly transfer your individually owned assets into it prior to your death (See more on trust funding here).
Property that is titled in an individual’s revocable trust at the individual’s death is administered by the trustee of the revocable trust (chosen by the individual creating the revocable trust) without court oversight.
Another advantage to a revocable trust rather than a will is that a revocable trust can control how an individual’s property held in the revocable trust is administered during the individual’s life. This is critically important if the individual becomes mentally incompetent or disabled and needs his or her successor trustee to step in and manage the property for the benefit of the individual. A will only applies at an individual’s death, and therefore it does not accomplish any type of disability planning.
A revocable trust also provides for privacy with respect to the terms of disposition of assets, among other things. Unlike a will, the trust document will not necessarily become part of the court record. On the other hand, a will and its terms will be available to all who access the court record.