Facts About Revocable Trusts

With a Will, people own property in their own names until their deaths. Following their death, an Executor is appointed to administer the Estate, pay the bills and taxes, and distribute the property to the beneficiaries of the Will.

Under a Revocable Trust, people transfer the property they own from their own names into the name of a Trustee who then owns the property. At their death, since they do not own any property in their own name, there is no Estate to probate and administer. A successor Trustee manages and distributes the property following death according to the terms of the Trust which was established during life.

The Trust spells out who is entitled to the income and principal of the Trust during the life of the "owner".

All the owner's property is transferred to the Trustee's name so that no property is owned in the name of the individual owner at his or her death.

The person who owned the property (in other words, you can be the Trustee of your own Trust).
The person who owned the property and another person (often a family member or a bank).
A third person (family member or bank).

The Revocable Trust can be revoked, which permits the owner to cancel the entire Trust at any time.

The Revocable Trust can be amended by the owner at any time, just as he or she can amend their Will (as long as they are competent).

The possible incompetency of the Trustee must be considered. How will it be determined that a successor Trustee should be serving and who that successor Trustee should be? This also involves the issue of how and when the "Owner" can be removed as the Trustee.

If all property is owned by the Revocable Trust, there is an added element of privacy, since no Will or probate inventory is filed at the Courthouse. They are public documents anyone can examine.

Even when a Revocable Trust is used, a simple Will should also be signed to cover the possibility that all property did not get transferred to the Trust. The simple Will provides that any property owned outside the Trust at the owner's death will be transferred to the Trust. A Durable Power of Attorney should also be signed so that, if remaining property is discovered before death, it can be transferred to the Trust.

Federal Estate Taxes. There are no Federal Estate Tax advantages to using a Revocable Trust over a well-drafted Will.

Iowa Inheritance Taxes. There are no Iowa Inheritance Tax advantages to using a Revocable Trust over a well-drafted Will.

If the owner is the Trustee or a Co-Trustee, the Trust does not have to file for an employer identification number, and the Trust does not have to file a separate income tax return on a fiduciary income tax form. Rather, the owner simply files his or her personal income tax return just like before the Trust was established.

However, if the owner is not the Trustee or a Co-Trustee, a separate identification number must be obtained from the Internal Revenue Service; and a separate fiduciary income tax return must be filed on an annual basis showing all the income and deductible items of the Trust.

At death, there is a "step-up in basis" if property is held in a Revocable Trust, identical to the step-up in basis if property passes by Will.

For income tax reporting purposes, a Trust may elect to be treated as part of the decedent’s estate, and not as a separate Trust.

With an Estate, under current Internal Revenue Code provisions, passive losses from the ownership of rental real estate can be deducted up to $25,000 per year. This benefit is now available for Trusts.

Following death of the owner, the successor Trustee must apply for a new employer identification number from the Internal Revenue Service to use in filing subsequent income tax returns for the Trust.

A surviving spouse does not have the right to "take against the Will" if a Revocable Trust is used. If the surviving spouse is not adequately provided for under a Will, Iowa law grants the surviving spouse rights to approximately one-third of the Estate. No such right for a surviving spouse exists under a Revocable Trust.

Under the Iowa Probate Code, a surviving spouse and minor children may be permitted an allowance to be paid from the Estate for their support during the 12 months following death. No similar provision exists under a Revocable Trust unless the Trust provisions specifically provide for such an allowance.
When a Will is admitted to probate, notice is given to creditors and heirs, and four months later, the right to file a claim or contest the Will expires. Similar procedures are now available for a Revocable Trust, limiting claims and contests to 60 days after published notice or 30 days after mailed notice.

If property passes under a Will, the Executor is required to render an accounting to the beneficiaries (unless they waive the accounting). With a Revocable Trust, no accounting is required unless the Trust provisions require an accounting.

The "anti-lapse" statute applies with a Will. As a general rule, if a couple leaves property to their daughter, Mary, and Mary dies before they do, Mary's children (not her husband) will take Mary's share. There is no such automatic provision with a Revocable Trust. Therefore, such an intent should be specifically stated in drafting the terms of the Revocable Trust.

A Dissolution of Marriage revokes the provisions made for a spouse under a Will. This is now true for Revocable Trusts also.

Under Iowa law, the costs of administration of an Estate with a Will generally include legal fees of approximately 2 percent of the assets of the Estate (excluding life insurance payable to a named beneficiary and excluding one-half of joint tenancy property owned by husband and wife). If a third person serves as executor, there may also be an executor's fee of approximately 2 percent of the assets. Since there is no Estate with a Revocable Trust, the cost of administration of the Estate is saved.

Even with a Revocable Trust, some legal work will be necessary following death. The most likely matters are:

However, there is more expense involved in establishing a Revocable Trust and assuring that all the owner's property is transferred to the Trust than is involved in drafting a Will.

In Iowa, homestead real estate transferred to a Revocable Trust is still eligible for the homestead exemption. This is not true in all states.

In Iowa, no transfer tax is payable on the transfer of real estate to a trust. This is not true in all states.