Estate Planning with a Revocable Trust: A Case Study

8/15/2022 - By Brett Snyder, JD, LL.M and Christina Maslen

Clients often ask about how a revocable living trust operates during their lifetime, when it becomes irrevocable, how it interacts with their last will and testament and the benefits of creating a revocable living trust.

The best way to answer these questions is usually through an example. Meet Craig and Naomie who live in Pensacola, Florida. They have been married for over 40 years and are now retired in their late 70s. They have a 45-year-old son named Shep who is in sales and a 39-year-old daughter named Kathryn who owns a clothing boutique.

Over the years, Craig and Naomie have been diligent in their estate planning. They have each executed a last will and testament, and they have both created a revocable living trust. With the federal estate tax exemption being over $22,000,000 for a married couple, they are not worried about incurring estate tax at their deaths. Combined, their net worth is approximately $5 million.

During their lifetimes, Craig acts as the trustee of his trust and Naomie acts as the trustee of her trust. They can freely use the assets inside their trusts, take assets out of their trusts, put assets in their trusts and even terminate their trusts. Moreover, they can freely change the terms of their trusts by amending or even restating them entirely. Generally, a separate tax return will not have to be filed for a revocable living trust as the activity will be reported directly on Craig and Naomie’s personal tax return. However, upon their deaths, their trusts will become irrevocable. This means, the terms of their trusts can no longer be changed, and the terms within their trust agreements govern how the assets will be disposed.

For example, when Craig dies, his last will and testament leaves any assets not expressly bequeathed to a beneficiary to his revocable living trust. This type of last will and testament is generally referred to as a “pour over” will. Additionally, his revocable—now, irrevocable—trust creates a new trust for the benefit of Naomie which Shep and Kathryn are named co-trustee. Per the terms of the agreement, Naomie is entitled to receive income payments (such as interest and dividends) on a quarterly basis. She can also receive payments of principal for health, education, maintenance, and support at Shep and Kathryn’s discretion. This newly created trust will be required to file a separate tax return on an annual basis. Should Naomie die before Craig, her will and trust have similar provisions to Craig’s.

Having a revocable living trust in place can provide several benefits to the trust grantor creating the trust, i.e., Craig and Naomie, including:

Assets held in the trust will avoid probate which can be costly and time-consuming.
In the event the grantor becomes incapacitated, assets held in your revocable trust will be managed by your successor trustee which avoids the costs of a guardianship being created.
It provides peace of mind in knowing how your assets will be administered once you have passed.

Questions?

If you have any questions about estate planning with a revocable trust, please reach out to the Trust and Estate team!

About the Authors | Brett Snyder, JD, LL.M and Christina Maslen

Brett is a senior in the Tax & Accounting Services practice of Saltmarsh, Cleaveland & Gund. Prior to joining Saltmarsh in January 2013, he worked as a litigation assistant and completed a five-month externship with the Mississippi Office of the Attorney General and also worked as a staff accountant for an accounting firm in Birmingham, Alabama prior to attending law school. Brett’s primary areas of experience include tax research, planning and consulting.

Christina is a manager in the Tax & Accounting Services practice of Saltmarsh, Cleaveland & Gund. She has been practicing public accounting since 2008 and joined Saltmarsh in August of 2011. Christina’s primary areas of experience include the preparation of individual, trust and estate tax returns and related accounting services.