The Revocable Trust in a Nutshell

Introduction
The primary purposes of a revocable trust are (1) to serve as a vehicle for managing property during life and (2) to serve as a substitute (but not usually a re­placement) for a will.  In addi­tion, it will assure a cer­tain measure of privacy to one's estate plan.  It should be noted at the outset that a revoca­ble trust is "transparent" for tax purposes.  That is, it does not affect by itself one's tax status either for purposes of income taxes or for estate taxes.  The IRS doesn't want to know about it.  In the normal situa­tion, a revocable trust uses the Settlor's Social Security number as its taxpayer ID number during his lifetime, and all income is reported on his regu­lar Form 1040 without mention of the trust.  For estate tax pur­poses, the power to revoke retained by the Settlor is the equiva­lent of ownership and requires the inclusion of the trust assets in the Settlor's estate just as if he had owned them out­right at date of death.  Conversely, the transfer of property to a revocable trust does not precipitate a gift tax, and no gift tax return is required to be filed when the trust is set up.

Definition
A revocable trust is a special type of contract between the "Set­tlor" or "Trustor" (the owner of the proper­ty) and the "Trustee".  The Set­tlor turns over certain property to the Trustee who thereaf­ter holds title to the property and manages it ac­cording to the Set­tlor's instruc­tions as set forth in the Trust Agreement.  A revocable trust is, by its terms, revocable.  That is, the Settlor has the right, dur­ing his lifetime, to alter or amend it in any way or to revoke it com­pletely without obliga­tion to or consent from anyone.  Obvious­ly, if the Settlor has become incompetent, the document has, for prac­tical pur­poses, become irrevo­cable, because no other person has the right or power to alter or amend it.

Purposes
The trust document usually contains language granting broad powers to the Trustee to manage the Settlor's assets, pay the Settlor's bills, provide for his care and comfort, and otherwise see to the proper adminis­tration of his proper­ty during his life.  It also usually contains instruc­tions dealing with post-death administra­tion including the payment of death taxes, funeral expenses and the ad­minis­tration expenses of the estate. Finally, there will be in­structions regard­ing the ultimate distribution of the remainder.  For example, there might be an outright distribution of the proper­ty to a spouse or to the children, or a contin­ued trust for them or for others, or gifts to charity -- in essence, the same type of provi­sions which would otherwise be con­tained in a will.
 
Pourover Will
If a revocable trust is a substitute for a will, what is the pur­pose of the "pour­over will"?  Well, despite what is sometimes said in the popular press, probate has its good points.  One primary purpose is to provide control over the ap­pointment of an "offi­cial" representative (an "Exe­cu­tor" or "Personal Represen­tative") to deal with the tax authorities, credi­tors, and others.  These people  and organizations are sometimes reluctant to deal with a representative of a de­cedent's estate unless he or she has the sta­tus that comes with a court's ap­pointment to that capacity.  A second­ reason for probating an estate is that probate serves to cut off and bar cred­itors from pursuing claims after a certain period of time (usually three months).  With probate, a creditor must file his claim within the time limit set by statute, litigate it if neces­sary, and abide by the final result.  If there is no probate, there is no assurance of a cut-off point.  Thirdly, the "pourover" por­tion of the will assures that any property which may have been over­looked or forgotten in the Settlor's estate when the settlor transferred his property to the Trust during his lifetime will be picked up and "poured over" into the trust.  Finally, for per­sons with minor chil­dren, a will admitted to probate provides a vehicle for inform­ing the Court as to the decedent's wishes concerning the appointment of a guardian for the minor child.  Thus, while the "probate es­tate" may be minuscule or even non­existent, there are many advan­tages to having a will and to filing for probate.

Privacy
Absent an unusual situation, the revocable trust is not usually filed with the Court and thus does not become available for public inspection (as are probate records) nor is it usually sub­ject to the court's jurisdiction.  From the court's point of view, the Trustee is just another in­terested party as are the spouse and children.  The pourover will and revocable trust allow cer­tainty and finality in the wrapping up of one's lifetime affairs while at the same time pro­viding for flexibili­ty and privacy for one's post-death plans.

Durable Power of Attorney

The financial durable power of at­torney has an important role to play as well.  Its primary purpose is to allow the Settlor to delay trans­ferring property to the trust even until after the onset of incapacity.  Many people, for various reasons, are unwilling to part with control over their property until absolutely necessary.  The act of trans­ferring their assets to the Trustee of a revocable trust is looked upon as a loss of control even though the power to revoke is an absolute power to retrieve the prop­erty from the Trustee and even though the Trustee is the Settlor.  A dur­able power of attorney allows the Settlor to delay the transfer with­out fear of upsetting the purpose of the trust.  A durable power of at­torney is "durable" because it is effec­tive even though the person who signed it (the Principal) is incom­petent.  All states now au­thorize the use of a durable power of attor­ney.  Prior to such laws, the power to act of the attorney-­in-fact ex­pired when his Principal became incompetent.  Now it is possible to "fund" a revo­cable trust with ten dollars and postpone any large-scale transfers of assets to the Trust until the Settlor is unable to act for himself, at which time the attorney-in-fact can transfer the prop­erty to the Trustee and the Trustee will then administer the prop­erty according to the in­structions contained in the Trust Agree­ment.
 
Conclusion
The revocable trust and its com­panion documents provide a flexible, ration­al approach to the problems of plan­ning for infirmity.  Some people object to the complexity and cost of this type of planning.  Some of us will be blessed with a relatively swift exit from this life, and for them such planning will not be neces­sary.  For the rest of us, con­tinuing advances in medical science almost assure us of a period in which we will need to have others look after our affairs.  These documents allow us to plan ahead and control events (to the extent we can, while we can) rather than to leave it to chance or worse.