Introduction

As part of our enterprise discovery review process during client onboarding and assessment of their Family Wealth Enterprise (FWE), we routinely evaluate their estate plans. We often find that clients heavily rely on intricately designed last wills and testaments. These documents are filled with detailed provisions outlining desires for asset disposition.

While a comprehensive last will and testament is advisable for most closely held business owners and entrepreneurs, using it as the sole anchor for an estate plan can introduce significant vulnerabilities. This becomes particularly evident in the event of an unexpected passing. This reliance on traditional wills raises significant questions about the alternatives available for more secure estate planning. Enter the revocable trust, a tool that offers both versatility and security in the realm of estate planning. As we delve deeper, we’ll explore the numerous advantages of revocable trusts and their potential to revolutionize how we approach estate planning.

The Pitfalls of Traditional Will-Based Estate Planning 

1.  Public Disclosure Risk

A recurring theme we observe in our discovery process is the strong inclination towards last wills and testaments. While detailed and thorough, these documents, once someone passes away, become public records. They’re filed with local chancery or courts that handle probate estates and other family matters. This means anyone can access them. Consequently, private information about the deceased becomes public knowledge. That’s often why soon after someone’s passing, family members might find themselves contacted by brokers, wealth managers, and financial professionals. There are even services that extract this information for marketing purposes.

2.  Court Oversight & Business Disruptions  

Apart from the privacy concern, using a will as the cornerstone for estate planning can risk the estate’s integrity, particularly if the person passes away suddenly. The court plays a significant role in overseeing the estate, which frequently includes closely held businesses. This oversight might disrupt current operations or hinder asset transfers, possibly affecting the estate’s growth potential.

3.  Challenges with Durable General Power of Attorney 

Additionally, in the absence of a revocable trust, many individuals depend on a durable general power of attorney for financial matters if they’re incapacitated. Unfortunately, institutions like banks or real estate attorneys sometimes reject these powers of attorney due to potential legal liabilities.

Advantages of Revocable Trusts

1.  Privacy

For a closely held business owner with a meticulously crafted revocable trust, the provisions typically found in their will are seamlessly integrated into the trust, sidestepping the traditional last will and testament. Accompanying such a trust is often a ‘pour-over will,’ a streamlined document that primarily identifies the executor and lists the revocable trust as the sole beneficiary. Its purpose is singular: to transfer any assets not moved into the trust during the owner’s lifetime, directing them into the trust upon their passing. This structure ensures that the specific distribution and control stipulations of the trust remain private. Only the brief and straightforward last will and testament gets filed with the court, safeguarding the details from becoming public record.

2.  Asset Management During Incapacity

Individuals without a revocable trust, or those who haven’t adequately funded one, often default to using a general durable power of attorney to manage their financial and tax affairs. However, as mentioned previously, this approach can encounter obstacles. Some institutions or advisors might hesitate or outright refuse to recognize the power of attorney — hindering crucial financial decisions, asset relocations, sales, or other pivotal transactions. By channeling assets into a revocable trust equipped with provisions for incapacity, many of these complications can be bypassed. Absent such a structure, any resistance to actions proposed under the general durable power of attorney could force the estate into seeking a conservatorship, necessitating the appointment of a guardian ad litem to supervise the incapacitated owner’s estate. This route, fraught with intricate legal procedures, not only escalates administrative hassles but also inflates costs due to the engagement of an external guardian ad litem. Collaborations with this guardian for requisite approvals further complicate matters. In contrast, assets moved into a revocable trust empower a successor trustee to seamlessly intervene during disability episodes, mitigating the chance of daunting situations we’ve seen played out.

3.  Asset Management During Incapacity

Typically, individuals without a sufficiently funded revocable trust will depend on their last will and testament, the appointed executor or executrix, and judicial oversight to manage the probate procedures of the estate. This encompasses tasks such as asset valuation, potential disclosure of asset inventories, asset transfers to beneficiaries, and sometimes necessitates court approvals for particular transactions or asset movement, which can be intricate and challenging. Businesses, especially those actively making strategic moves like debt acquisition, refinancing, or major asset trades, can be significantly impacted. Certain decisions might hinge on court consent. Indeed, until the estate has gone through the probate proceedings, the business might experience a leadership vacuum. Given these potential complexities, we strongly advocate the use of revocable trusts, particularly for those possessing intricate assets like closely held businesses or real estate holdings. When assets are owned by a revocable trust during the owner’s lifetime, the transition post-death is seamless. The successor trustee can immediately assume their role, ensuring business continuity and the smooth operation of the entire family wealth enterprise without administrative hindrance.

Demystifying Revocable Trust Misconceptions

Many individuals are hesitant about setting up a revocable trust, fearing that it might restrict their access to or enjoyment of their assets. However, these concerns are unfounded. A revocable trust doesn’t limit the beneficiary’s ability to fully enjoy their assets throughout their lifetime. The original asset owner, who also serves as the trust’s grantor, retains full flexibility. They can modify or amend the trust, contribute or withdraw assets, or even dissolve the trust altogether without any external interference. This ensures uninhibited access and enjoyment of the assets.

For tax purposes, the revocable trust is considered a disregarded entity at the federal level. Thus, it doesn’t necessitate an additional income tax return, ensuring no added tax complexities.

Common Pitfalls with Revocable Trusts

A frequent oversight with revocable trusts is the grantor’s failure to fund them properly. To fully harness the advantages of a revocable trust, such as effective asset management during incapacitation or post-death and maintaining asset privacy during probate, assets must be transferred to the trust during the grantor’s lifetime.

While the process of transferring assets isn’t overly difficult, it demands meticulous attention and collaboration with a knowledgeable advisor. This ensures a comprehensive asset identification, the formulation of a strategic plan for transfer, and its timely execution.

In our assessment, when executed correctly, a revocable trust emerges as one of the most straightforward and beneficial estate planning tools, especially for owners of intricate assets.