Right now, the estate tax exemption surpasses $10 million (doubled if a client is married), and although it is due to revert back to $5 million (adjusted for inflation) in 2026, many clients believe their revocable trusts have become obsolete. The truth is, a revocable trust offers many benefits a plain old last will and testament cannot. Understanding why it is still important to have a revocable trust will position you as the trusted advisor who can spot the issues and then call in your expert team of partners to fix the problems.
Four Investment Management Advantages of Revocable Trusts
#1 – Revocable Trusts Help You Faithfully Implement Your Investment and Distribution Strategies. When a client dies, custodians freeze accounts owned individually, which can complicate your asset management process, especially if you are tactical or are making periodic distributions. But a revocable trust with a co-trustee or successor trustee can be managed seamlessly, without the need to open another account and transfer assets.
#2 – Revocable Trusts Simplify Management of Illiquid Alternative Assets. This is especially true of real estate, private equity, and private debt. Normally it is much simpler to alert an issuer/sponsor about a change in the acting trustee(s) than to retitle such accounts or property, especially since many sponsors fail to offer Transfer on Death provisions. And, if these investments are spread across multiple states, a revocable trust also avoids opening probate in each jurisdiction.
#3 – Revocable Trusts Reduce Paralysis or Rash Changes During Times of Grief. A grieving surviving spouse often suffers from either decision-making paralysis or may opt for an entire investment strategy change. By holding the client’s accounts and property in trust, you lighten the client’s decision-making load during a stressful time, and help the client avoid rash changes instigated by new account and transfer paperwork. Depending on the mix of accounts and property and the current market price, premature liquidation may produce a disappointing outcome.
#4 – By Helping Surviving a Client Avoid Rash Changes, You Add Tax Alpha. While all the accounts and property in certain revocable trusts may enjoy a step-up in basis, in many cases those notionally owned by the surviving spouse will not. If the account or property’s basis is low and a surviving spouse opts for a wholesale sell-off, it may lead to unnecessarily large capital gains taxes.
Four Things a Trust Can Do That a Will Cannot
#1 – Act as a Disability Plan. A revocable trust provides protection during three phases: what happens while the client (trustmaker) is alive and well, what happens if the trustmaker is alive but not so well, and what happens after the trustmaker dies. It is during the second phase that a trust really outshines a will – if the trustmaker becomes unable to manage their affairs, the trustee can step in and take care of things immediately and without court intervention. This keeps the trust property under control of a trusted family member or friend instead of a guardianship judge.
#2 – Keep Assets Outside of Probate. Probate is a time-consuming and costly court-supervised public process. A will-focused estate plan will land the client’s family squarely in probate court. A trust-focused estate plan allows the trustee to step in and carry out the client’s final wishes without any court involvement or oversight.
#3 – Keep a Minor’s Inheritance Outside of Guardianship. A minor who is named as the beneficiary of a life insurance policy, IRA, or payable-on-death account will require a court-appointed guardian to manage the property until the minor turns 18. On the other hand, a trust for the minor can be created in a revocable trust and named as the beneficiary of a policy or account. This allows the client to decide how long the trust will continue – age 25 or 30, or even the beneficiary’s lifetime – not just until 18.
Note: Due to the additional tax considerations involving retirement accounts, it is important that your client discuss their wishes with their tax advisor and us, to ensure that the client’s plan is not frustrated by unforeseen taxes.
#4 – Keep Final Wishes Private. A will filed for probate becomes a public court record, which means anyone, including predators and your competitors, can go down to the local probate court and read wills and other probate documents. On the other hand, a revocable trust is a private document that remains confidential during life and after death.
How Your Practice Will Benefit From Accounts Held in Revocable Trusts
Clients who have their accounts in revocable trusts make your day-to-day practice easier because:
- All accounts and property will be kept private so your competitors and other predators do not know who inherited what and how to contact the recipient.
- Avoiding probate can reduce settlement costs significantly, leaving more assets under your management.
- Accounts and property held in trust can be protected from the client’s beneficiaries’ lawsuits, divorces, bad decisions, and addictions, thus, keeping more assets under your management.
- Clients will value your help in keeping their accounts and property outside of guardianship and probate and their final wishes private.
- Clients will also appreciate your comprehensive approach to their financial planning and refer family and friends.
- You will be able to immediately work with an incapacitated or deceased client’s trusted family member or friend rather than waiting until the court decides it is okay to get started.
- You will become the trusted advisor who sees the big picture and knows all of the pieces of the client’s financial and estate plans.
Let’s Work Together
As always, we are available to answer your questions about revocable trusts and meet with clients and prospects who are considering ditching theirs or whose will just is not going to provide the protections they need. If you have a trust you would like us to review or any estate planning questions, please call. We are available to meet in person or virtually, whichever you prefer.