March 21, 2022
John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank, talks with John Maher about revocable trusts. He explains why some trusts can be changed (revoked). Then, he talks about the advantages of these trusts, when they become irrevocable, and briefly compares them to revocable trusts
Transcription Disclosure: Below is a transcript of the conversation between John Maher and John T. Brennan. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.
John Maher: Hi, I'm John Maher. And I'm here today with John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts. Today, our topic is revocable trusts. Welcome John.
John Brennan: Hi John.
What Is a Revocable Living Trust?
John Maher: So John, what is a revocable living trust?
John Brennan: Okay. So a revocable living trust is really a staple of the estate planning world. And revocable living trust is fortunately, as we were talking in the other podcast, really what it sounds like, namely a trust that is changeable.
A revocable living trust is special in that a living person creates it. And what it means is that a living person, and we touched on this in another podcast, a living person like you, John Maher, can own property and have it titled in your name. You can also title it in the name of the John Maher revocable living trust because while you are alive, you and the living trust are one and the same.
It is one and the same because all the trust activity, the economic activity, is captured under your social security number. So that revocable living trust, usually that means that person is alive and they have the power to change that trust at will. That trust only becomes permanent when you pass away. And it becomes permanent because obviously you are no longer able to revoke or change your trust. So the revocable living trust allows grantor and trust to hold property simultaneously and allows the grantor or the trust maker to change it trust at will.
Process of Creating a Revocable Living Trust
John Maher: Okay. So what is the process of creating a revocable living trust?
John Brennan: Well, you create a revocable living trust by writing out the trust terms. Now, before anybody tries to undertake this on their own, I recommend you use an attorney who specializes in the creation of trusts. Why? Because it's a complex process. The tradition of trusts dates back literally 1,000 years. Trusts began in England in about the time of the Battle of Hastings or1066. So it is an entity that comes from case law. It comes from years and years of back and forth in terms of what's allowed. And it's been something that's come across literally through centuries. So if you are going to create a trust, the best thing to do would be to go to an attorney who specializes in it and say, I'd like to create a trust.
Pros and Cons of a Revocable Living Trust
John Maher: Okay. And then tell me a little bit about some of the pros and cons of a revocable living trust.
John Brennan: Well, the pros of a revocable living trust are the fact that you can change it. While you're alive and while you have the will, you can change your trust as many times as you want. The good thing about this and one of the advantages of having a trust in an estate plan is that wills have to be executed with a high degree of formality. You have to have signatures, you have to have witnesses. You have to notarize your signatures. Ideally you put your initials on every page of your will.
But if you want to change your trust, you can really just go ahead and change it by stating this is the first amendment to my trust, and you don't have to get the witnesses. You don't have to get the signatures. It is a much simpler process to change your estate plan. Also, going back to the revocable living trust that I talked about earlier, you have the ability that you as an individual and your trust can hold title simultaneously. This is advantageous because it avoids probate if you were to pass away. The title would vest in your revocable living trust if you and your trust own it at the same time.
What Can You Change in a Revocable Living Trust?
John Maher: And so you mentioned that with the revocable living trust, it's revocable, it's changeable. What are the things that you can change or that you typically change? Is it the assets that are in the trust? Is it the beneficiaries of the trust? Are there other things that you can change?
John Brennan: Well, the assets in the trust… that goes back to funding of the trust. So yes, you can take property in and out of the trust if you wanted to, but once you've gone to the trouble of creating a trust, it probably makes sense to put as much of your property as possible within the trust. So that's typically what you want to do. What was the second part to your question, John?
John Maher: Can you change the beneficiaries?
John Brennan: You absolutely can change the beneficiaries. Somebody gets on your nerves, they're out. You want to change things up. Absolutely. And also, maybe you had trust provisions, which spoke to your house in Florida and you sell your house in Florida. Well, you can change the trust. You can exercise it. That's not a problem.
The other advantage of having a trust is the property around it can change. Meaning you could have that house in Florida, let's say you decided to sell it and the title was in the name of your trust. Well, guess what? Now the proceeds from the sale could still be in the name of your trust and be a trust asset, even though they've changed form.
Uses for a Revocable Living Trust
John Maher: So what are some of the things that a revocable living trust is typically used on?
John Brennan: Well, the revocable living trust at this point is almost the blue light special of estate planning, especially tax planning, and even more specifically tax planning where there's a low threshold for an estate tax such as Massachusetts. And the reason why is that you commonly would have a twin revocable trust scheme between a husband and wife.
You'll have to forgive me because typically when I explain trusts to people for the first time, I have a piece of paper, but imagine a husband and wife at the top of the sheet of the paper and then below them is a big box, okay, a big square. Now Massachusetts has an estate tax of $1 million, which you can give away without tax. If you have a married couple and they have $2 million between them and you have the husband gift everything to the wife, and then she dies with $2 million, all of that money gets taxed.
If you have a husband and a wife and they divide the assets between them, and the husband dies first, because unfortunately that's just how the demographics go. And that husband leaves that money in their revocable trust, which in turn benefits the wife, it means the husband has used his coupon or his ability to pass property free from the estate tax, by using a trust. And then the wife still owns one million, but when she passes, she uses her coupon and her ability to pass property without the estate tax. So that scheme of having twin revocable trusts and assets divided between married couples is something that was very common and still common in low estate tax threshold states, but used to be very common when the estate tax was more common and more prevalent and also much lower on the federal level.
Differences Between Revocable and Irrevocable Trusts
John Maher: Okay. So we're going to be talking about irrevocable trusts at another time in more detail, but can you tell me a little bit about the differences between a revocable trusts and irrevocable trusts?
John Brennan: Well, the big thing is, and you might've guessed it, is revocable you can change; irrevocable you can't. Now I say "can't" with a caveat. We've talked about revocability already where you have the ability to make amendments to your trusts. On the irrevocable trust, the idea is that you can't change it, that it's written in stone. That once you've done it, it's done. Boom. Written in granite.
Well, that's almost true because there are some provisions where if you get everybody who's involved in the trust literally, but perhaps figuratively, in the same room and they all say, "The trust purpose is X and in order to make sure we continue to honor that trust purpose, we're not changing the trust in any material way, but it makes a lot of sense to change this here and this here."
You can do this either by going to the court and saying, this trust needs a tweak, or sometimes you could have what's called a non-judicial settlement where everybody gets in the same room and says, okay, we're going to make a little change to this trust, but not violate the intent of the grantor or the material purpose of the trust. So that's the big distinction. Revocable you can change; irrevocable you can't.
Adding If-Then Clauses to Trusts
John Maher: Are there ways to, with an irrevocable or irrevocable trust, to have provisions that prevent certain changes or make plans for dissolution of the trust if certain things happen? Can you stipulate some requirements like that?
John Brennan: Absolutely. So trusts are designed with if-then clauses as I call them. If X happens then Y. So absolutely. And that's the advantages of having really any asset in a trust is that you have the ability… you have that trustee who's able to look at the facts and circumstances that take place after the grantor is gone and make a decision that's in accord with trust terms and the values of the grantor or the trust maker. This ensures that the trust does what the person wanted it to do.
Tips for Using Revocable Trusts
John Maher: What are some tips you think on using revocable trusts? Are there any sort of tips that you could offer?
John Brennan: Well, the big tip is to use one if you need one. Trusts, period...are extremely adaptable. They are individuated by circumstances, by someone's values, and by someone's trust terms. So they're very powerful tools to see that someone's wishes are carried out. You want to see something happen to your property when you die. This is the vehicle that can deal with changing circumstances and direct things the way you want them once you're gone.
John Maher: Any final thoughts on revocable trusts?
John Brennan: No, just that they're great tools and can serve people's needs in a variety of ways. And can also, like I said, deal with changing circumstances, deal with different forms of property, deal with both financial assets and then also an art collection and potentially somebody's pet dog. Their ability to deal with various types of property and circumstances is really unparalleled and it makes them the premier tool for any kind of estate plan.
Contact Cape Ann Savings Bank to Talk About Trusts
John Maher: All right. Well, that's really great information, John. Thanks again for speaking with me today.
John Brennan: Sure thing, John.
John Maher: And for more information, contact Cape Ann Savings Trust & Financial Services at (978) 283-7079. Or visit the website at capeannsavings.bank.
Investments purchased through the Cape Ann Saving Trust & Financial Services department are not FDIC insured, not FDIC guaranteed, not bank guaranteed, and may lose principal value.