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Abstract

Revocable trusts are one of the most common estate planning techniques. Unfortunately, many advisors use them without considering the merits for the particular client. Like any other estate planning technique, they are appropriate only for some clients.

Typically, a settlor creates and funds a revocable trust during his or her lifetime. The settlor then uses trust funds to pay living expenses. Upon the settlor’s death, the successor trustee administers the trust, collects the settlor’s assets, pays creditors, and distributes the assets to the named beneficiaries. In the optimum case, this is done without any court involvement.

Due to the lack of court involvement, it is possible to use a revocable trust to avoid probate and reduce the associated expenses and delays. However, this goal is achieved only if settlor transfers all of his or her property to the trust during his or her lifetime. As a practical matter, this almost never happens.

Revocable trusts also provide advantages in terms of privacy (after the settlor’s death) and planning for the settlor’s incapacity. However, these advantages, like probate avoidance, are obtained only if the trust is funded during the settlor’s lifetime.

Revocable trusts also have disadvantages; most notably, increased complexity during the settlor’s lifetime and higher estate planning costs. The essence of the trade off is that the settlor suffers the disadvantages during his or her lifetime. The advantages are mostly savings and efficiencies that obtain only after the settlor’s death.

Whether this trade off is acceptable is up to the attorney and client to decide based on the situation of the specific client. Such a subjective balancing is not easy. However, the client is not well served by an estate planner that eschews careful analysis in favor of using revocable trusts for all (or no) clients.

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