Revocable and Irrevocable Trusts

A reader wants to know if it is a problem that their revocable and irrevocable trusts aren’t funded. 

Q: On the advice of an attorney, many years ago my wife and I each created a revocable trust. We never funded the trusts because all our major assets, including stocks, bonds and cash, are in a brokerage account that is designated with a “Transfer On Death“ provision. These will go to our son and daughter.

Our concern is with our house that we own jointly. We are fairly certain that this should be in a trust. Because a trust was created for each of us we don’t know which trust the house should be placed in. The attorney who created the trust for us was a one-person office. He has since passed away, so we hope you can help us.

What is a trust?

A: Let’s start with a basic definition of a trust. A trust is a holding tank for real and personal property. The assets that are placed into a trust are held for the financial benefit of the named beneficiaries of the trust.

The trustee controls the trust, within limits written into the trust. And, there are mechanisms for naming successor trustees, in case the trustee dies, becomes incapacitated or steps away for some reason. Finally, there are mechanisms for naming successor beneficiaries, who will receive the financial benefits derived from the trust after the primary beneficiary dies.

There are generally two flavors of trusts: revocable and irrevocable. Revocable trusts allow the trusts to be revoked, terminated or modified. The terms of irrevocable trusts cannot be revoked or modified.

What happens if you sell property in a trust?

There are so many uses for a revocable or irrevocable trust – too many to list here. In addition, there are many estate tax considerations. But we suspect that the primary reason for creating two trusts (one for you and another for your spouse) was to keep a certain amount of assets in your name and the balance in your spouse’s name.

Trusts allow the assets owned by the trust to go to your heirs without having to go through probate. So, if you and your spouse die, the trust documents could, and should, name your kids (or other heirs) as equal owners of whatever the trust owns.

We also suspect that the attorney would have wanted you to hold title to the home in the name of both trusts, with each trust owning a 50 percent interest in the home. Again, depending on the assets you and your spouse own, we could see the attorney recommending that the home be held solely by one spouse’s trust.

For example, if you inherited a substantial amount of assets, which you hold separately (perhaps in yet another trust), you might be over the federal estate tax exemption limit. Adding another asset to your side of the balance sheet might mean you and your spouse would pay more in estate taxes than if your spouse puts that asset in their trust.

Do revocable trusts need a separate tax identification number (EIN)?

Which brings us to another reason people like trusts: they can help maximize the estate tax exemptions given by the Internal Revenue Service.

In 2024, the federal estate tax exemption is $13,610,000. This means that if you die in 2024, the federal government will not impose an estate tax on any of your assets if the total is under the $13,610,000 exemption limit. But, if your estate is worth more than that, the IRS will tax the excess amount. (Some states also have an estate tax on estates worth more than a certain amount. In some states, that amount on which the state starts taxing estates is much lower than the federal estate tax exemption.)

Revocable and irrevocable trusts can help with tax issues

Most families and individuals will never have more than $13.6 million in assets. If they don’t, they won’t have to worry about paying federal estate tax. But for those families with very large estates, estate planning attorneys use trusts to maximize each spouse’s ability to utilize the full federal estate tax exemption.

We assume that you and your spouse are below the limit. If that’s the case, then there are only two issues to consider:

  1. How you want to hold your assets while alive.
  2. How you want to dispose of them after your death.

Start by reading your trust documents to see who gets what and when. We suspect your spouse’s trust says that you are the successor beneficiary to your spouse’s trust and you are the same for hers. After your deaths, the trusts will transfer ownership of the assets to your kids or other heirs.

What’s the difference between a trust and a life estate?

You and your spouse may want to transfer ownership of your home into your trusts and each trust would become a half owner of the home. And, consider the other assets you own and whether these should be transferred into the name of your trusts. Your car can be transferred into your trust while your spouse’s car would go into hers. Likewise, if you own any other real estate, you might want to consider putting those properties into the trust.

And, while you say that your brokerage account has a transfer on death (TOD) instruction on the account, make sure that the transfer on death instrument is up-to-date. At some point in the future, you or your spouse may no longer be around and you may be the sole owner of those assets.

Successor trustees and successor beneficiaries are important for revocable and irrevocable trusts

But let’s say one of your children has an untimely death. You’ll want to update your transfer on death documentation to have that child’s share go to the deceased child’s children. Otherwise, all of the assets go to one of your kids and none to your grandchildren of your deceased child. If there is a marriage, divorce or children, you may also want to make a change to your estate plan. 

A transfer on death document only offers a few sentences to specify who gets what and under what circumstances. A well-drafted trust document will consider the many ways life changes for beneficiaries and trustees

Please talk with a good estate attorney to discuss all of your assets. You can discuss your TODs and any other estate planning you’ve already done. Getting a top-down look at all of your assets and the intention behind them is important and helpful. Otherwise, you may find yourselves wishing you had done something different – only to find out it is too late.

Read more about Revocable and Irrevocable Trusts:

Revocable vs Irrevocable Trust: Which is Better

Should I set up a trust or use a transfer-on-death (TOD) deed?

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©2024 by Ilyce Glink and Samuel J. Tamkin. Distributed by Tribune Content Agency. A1619