What Is A Revocable Trust?
Revocable trusts are an important and useful part of equity, estate and trusts law. Read about how these types of trusts impact upon you and your situation.
Chances are that you will encounter a trust in some form at some stage of your life. They are a large part of legal arrangements, and can be used for a range of purposes. These may include investment or business purposes. Also, they may be useful for giving on-going support for a beneficiary in your will, or enabling tax effective strategies for estate planning. One type you may come across is a revocable trust.
A type of living trust, a revocable trust is a fiduciary relationship created during an individual’s lifetime. This is where a chosen person, the trustee, is given responsibility for managing that individual’s assets for the benefit of the eventual beneficiary. In simple terms, the trustor or grantor of the trust can revoke or amend it as they see fit. As such, the revocable trust may also allow the trustee the discretion to make such changes too. The settlor or grantor assigns these powers. Conversely, once signed, an irrevocable trust can no longer be altered, and is incapable of exercising any discretion in the distribution of property to beneficiaries.
Common Situations & Benefits
Each person’s own circumstances are unique. Accordingly, the way in which an individual’s property is structured, and how they want that property to be dispersed to beneficiaries can be complicated. There are a range of factors to consider. With this in mind, it is useful to be able to trial a process without being locked in. There are a number of instances where the flexibility of a living revocable trust is good. For example, you might wish to see how your children might use their money. Or you may be waiting to see how a business venture pans out. Other useful aspects include the following:
- firstly, they are flexible
- secondly, can minimise probate costs
- thirdly, prevent and minimise challenges to your estate
- in addition, allow for continuous management, not one off distribution
- lastly, accommodate assignment of discretion for power of attorney/guardianship
As with any legal arrangement, there are always tax factors. Trusts are no exception. Therefore, it is wise to familiarise yourself with these tax laws. How they affect your situation will vary based your circumstances.
Federal legislation limits the use of trusts for the purposes of tax avoidance.
The Income Tax Assessment Act 1936 (Cth) outlines a provision that has the effect that the trustee pays tax on the distribution. Section 102 of the Act applies when the settlor has the power to revoke or alter the trust so as to acquire a beneficial interest in trust income or income making assets. However, section 102 of the Act does not apply where the settlor of the trust has provided only a nominal amount to establish the trust and is unrelated to the beneficiaries and trustees of the trust. The Australian Taxation Office website contains more information on these tax requirements.
Equity and trusts are not an easy part of the law to grasp. They are deep concepts which require a great deal of thought. It is best practice to obtain as much information possible before drawing up a trust. Whilst there are some benefits to a living revocable trust, there can be drawbacks. These drawbacks can only become apparent the more you explore your options. The type of trust availed to you will mainly depend on your own unique needs, and what you seek to achieve. As such, it is wise to consult with a trust lawyer to gain a greater understanding of your situation.
Paul is an intern at Lawpath, and is currently studying a combined Arts/Laws degree with a major in criminology at Macquarie University. Paul has an interest in legal tech, which complements his broader interest in cyber crime/security and the way in which it is changing the world.