Talking Trusts & Estates for Advisors: When to Use Revocable Trusts vs. Alternative Strategies

A comprehensive resource for financial advisors on trusts, estates, and wealth transfer strategies—featuring expert insights, legal updates, and actionable estate planning guidance. Talking Trusts & Estates for Advisors: When to Use Revocable Trusts vs. Alternative Strategies Bryn Mawr Trust’s Jamie Hopkins details how revocable trusts work, their benefits and when it is appropriate to use them. Welcome to Talking T&E for Advisors, where Trusts & Estates Editor in Chief Susan Lipp and Jamie Hopkins, chief wealth officer at Bryn Mawr Trust, take seemingly complex estate planning issues and break them down for financial advisors. In this video, they discuss revocable trusts: How do revocable trusts work in estate planning, and what are the benefits? When is it appropriate to use revocable trusts? What are transfer-on-death and payable-on-death designations, and when might they be a good substitute for revocable trusts? When is it a good idea to name a trust as a beneficiary, for example, of a retirement account? Read the full raw transcript below: Susan Lipp: Hello, I'm Susan Lipp, editor-in-chief of Trusts & Estates, and I'm speaking with Jamie Hopkins, CEO of Bryn Mawr Trust Advisors LLC and chief wealth officer of Bryn Mawr Trust. We'll be discussing alternatives to revocable trusts, based on an upcoming article in the September issue of Trusts & Estates by Ali Khodadad and Jack Elder. Although revocable trusts are a core estate planning tool, they're not the only way to achieve probate avoidance and efficient asset transfer. In some cases, transfer-on-death and payable-on-death designations can be a better option. Susan Lipp: Let's start with the use of revocable trusts in estate planning. How do they work, what are the benefits, and when is it appropriate to use them? Jamie Hopkins: It's a great topic. Revocable trusts remain one of the most versatile and widely used tools in all of estate planning, because they can address multiple objectives at the same time with relatively low complexity and cost, while keeping some optionality in case things change in the future. The idea with a revocable trust is that the client transfers assets into the trust but continues to control them during their lifetime. Because the trust is revocable, they can amend or revoke it if their circumstances, their goals, or the world changes on them. So, outside of wills, revocable trusts are probably our number one planning tool, because they can be changed. Irrevocable trusts are just what the name says: for the most part, they're irrevocable. Once we set them up and fund them, those assets are set aside outside of our control in a way that a revocable trust's assets are not. The other thing is that most revocable trusts today cost very little. A very simple revocable trust could run just a couple hundred dollars with some of the digital tools, up to a couple thousand dollars. Irrevocable trusts involve more decisions and can be more expensive. One closing thought: a key takeaway for advisors is that good planning doesn't always require the most sophisticated, complex tools. For many clients, a simple revocable trust or will can accomplish their goals. Susan Lipp: Looking at some of the alternatives to a revocable trust, transfer-on-death and payable-on-death designations, when might they be a good substitute? Jamie Hopkins: They're great substitutes when we're really just talking about transferring assets from one generation to a beneficiary outside of probate. We won't accomplish much else with them. They're purely a transfer vehicle. So if we're using a revocable trust merely as a probate-avoidance and simplicity tool, transfer-on-death or payable-on-death designations work much like any beneficiary designation on a 401(k) or life insurance policy. The account transfers immediately at death to the named beneficiary. These designations are common for brokerage accounts, trust investment accounts, and bank accounts, and some states even allow them for real property and automobiles. I'd say that's less often the best route, though, because some titles need to be changed anyway. For simple financial accounts, these designations can be very cost-effective. It's essentially just updating a form with the bank or custodian, and it can be part of the overall plan. But it's unlikely to cover everything. Some trusts can cover most of our planning, whereas these designations are account-by-account, so we need to make sure they're coordinated with the whole plan. They're cheap, easy, changeable, require less administration, and carry almost no fees. Susan Lipp: We also sometimes hear about naming a trust as the beneficiary of, for example, a retirement account. When is that a good idea? Jamie Hopkins: This has become a bigger and bigger topic recently. Before the SECURE Act, it wasn't very common unless we were trying to consolidate a very large estate, and even then, we usually didn't use this tactic if we had other options. Over the last seven years, we've seen growth in the number of retirement accounts with trusts as beneficiaries, for a couple of reasons. First, the beneficiary situation. The beneficiaries may be minors or may face long-term struggles with financial management, creditors, or poor spending habits. There could be drug or gambling issues, or a spouse we have concerns about. In those situations, we want more control over the assets for our heirs, and a trust can be a valuable holding and control vehicle for longer than a traditional IRA or 401(k) beneficiary designation would allow. Second, and this isn't specifically in the article, there are a growing number of state tax benefits to using trusts as IRA and 401(k) beneficiaries. Delaware is now a very favorable state because out-of-state beneficiaries don't pay tax on investment gains inside the trust. Distributions from the 401(k) or IRA can go into the trust and get at least state-tax-deferred growth, which mimics more of what we used to get under the stretch IRA rules. At the end of the day, a lot of planning has to go into this decision. It's definitely not a default or a starting point. It's sometimes a middle ground that may not be the ultimate solution, but it can help where we have concerns about beneficiaries and want more long-term control, or where taxes are a priority because beneficiaries live in high-tax states. Susan Lipp: Thank you so much, Jamie. I appreciate your insights. Jamie Hopkins: Thank you very much. I think the article made a great point: the most complex estate planning strategies aren't always the best for your clients. Think about what can be simple, usable, and powerful in achieving their goals. Sometimes that's as simple as a transfer-on-death or payable-on-death designation, or a beneficiary designation.