Revocable Trust

A revocable trust can be amended or completely revoked by the settlor, without the consent of the trustee or a person holding an adverse interest in the trusts. Trusts executed on or after October 1, 2004, the effective date of the UTC, are revocable trusts (until an event that triggers irrevocability), unless the terms of a trust expressly provide that the trust is irrevocable.

The settlor retains control over assets held in a revocable trust. As long as the settlor retains capacity to revoke the trust, the rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to, the settlor. The capacity required to amend or revoke a trust or to direct the actions of the trustee is the same capacity as that required to create a trust, which, in turn, is the capacity to execute a will.

Although legal title to assets held in a revocable trust is in the trustee, a revocable trust has no separate tax identity (See I.R.C. § 674(a)). A revocable trust uses the settlor’s social security number as its tax identification number, and all income earned on trust assets is reported on the settlor’s personal income tax returns. A transfer to a revocable trust is not a completed gift (See Treas. Reg. §25.2511-2(c)). Assets held in a revocable trust are included in the settlor’s gross estate at the time of death.

A revocable trust may be revoked or amended by substantial compliance with the method provided in the trust instrument, or by any other method manifesting clear and convincing evidence of the settlor’s intent to do so, if the trust does not provide a method for revoking it, or if the trust does not expressly prohibit methods other than the method prescribed in the trust instrument.

In general, a person wishing to engage in estate planning for an incapacitated person must petition the court for approval of the action. The petition must give detailed information about the ward’s financial and medical condition, the ward’s wishes, the ward’s family situation, the effect of the proposed action on the ward’s well-being and on public assistance, and any potential tax effects of the action. A copy of the petition must be sent to anyone who benefits under the ward’s current estate planning documents, and to the ward’s heirs at law.

- Maureen C. Dwyer
Barradale, O'Connell, Newkirk & Dwyer, PA