REVOCABLE “LIVING” TRUSTS
Trusts have been used for legal purposes for hundreds of years – for many reasons. They are respected in all U.S. jurisdictions. The most common uses of Trusts in estate planning are: (1) to avoid probate, the court process of settling the estate of a decedent who dies with or without a Will; (2) to provide for deferred distributions to minors and formal management of assets until distribution (Parents often include a “just in case” trust); and (3) to facilitate tax planning for married persons with large estates where trusts for each other can be used to minimize the estate tax payable at the time of the second spouse’s death, as well as to protect the gifts within the deceased spouse’s family line. These are just some of the many reasons for creating a trust.
No matter the reason for, or the type of trust, certain terms apply to all trusts. A “settlor” is the person who creates the trust. A “trustee” is the person who manages trust assets. A “beneficiary” is the person(s) for whom the benefit of the trust is intended. Additionally, a trust will either be revocable or irrevocable. The settlor and/or trustee of a revocable trust may modify or revoke the trust fairly easily, according to the terms of the trust, while an irrevocable trust may not be modified or revoked at all, or except under limited circumstances outlined in the trust and/or in state law. When the term “Living” is inserted into the name, it means only that the trust is being created while the settlor is alive. If a trust is part of a Will, the trust portion is only effective at death, and is set-up as part of the probate proceedings to hold assets designated for beneficiaries named in the Will. This type of trust is called a “testamentary trust.”
When a settlor creates a trust, the settlor creates a separate legal entity. After creating the trust by signing a legal document, the settlor transfers ownership of assets from the settlor’s name specifically, into the trustee’s name as trustee of the trust. This is referred to as “funding the trust.” If the asset is real property, the settlor signs a deed transferring the real property to the trust. If the asset is a bank account, the settlor changes the owner of the account to the trustee’s name as trustee of the trust. If the asset is personal property, the settlor signs an assignment of the personal property to the trust. The duty of the trustee, who is named in the trust document, is to administer trust assets in accordance with the terms of the trust, for the benefit of the trust beneficiary.
The operation of a trust depends upon the trust purpose. A trust for the benefit of minor or disabled children often takes effect only after both parents have died. The parents may have included language in their Wills indicating that if they die before their children reach a certain age, the inheritance of the children will be kept in trust and managed by a trustee to provide for the support, care and education of the children until they reach a specific age. If the child is disabled, the trust may direct that the disabled child’s inheritance will remain in trust for the child’s lifetime, and the trust may be drafted in a way that preserves the child’s eligibility for government benefits.
When parents die without creating a trust for their minor children, it may be necessary for a probate court to appoint a conservator or guardian to manage the children’s inheritance. Although these proceedings are appropriate in some cases, they are costly, time consuming and require complex ongoing court oversight that trusts avoid.
Another common type of trust is known as a “revocable [living] trust.” A revocable trust is an estate plan that addresses three distinct phases of a settlor’s life and death: First, the trust makes clear that while the settlor is alive and well, he or she will serve as trustee and manage trust assets for his or her own benefit. Second, if the settlor becomes ill or injured to the extent that he cannot manage his finances, the trust identifies who will take over as trustee, and directs the successor trustee how to manage trust assets. Third, the trust directs the successor trustee how to distribute remaining trust assets after the settlor dies. As long as the settlor understands the nature and consequences of his or her actions, he or she can cancel or change the terms of the trust at any time – that’s why it is referred to as a “revocable” trust.
In the right set of circumstances, use of a revocable trust is a very efficient, flexible and reasonable estate planning device. A revocable trust can sometimes allow the estate of a deceased person to avoid the court probate process for settling estates. The probate process generates costs, delay and complexity, which some families prefer to avoid. In addition, if a deceased person owns real property in more than one state, a probate process may be necessary in each state before the real property may be distributed to beneficiaries – this can be costly and time consuming.
Use of a revocable trust however is not always the most appropriate for an estate plan. A revocable living trust is more complex to initially prepare, and thus may cost more in legal fees than a more basic estate plan, using a Will. A revocable trust must be properly funded in order to completely avoid the probate process, and it is important to appoint a reliable successor trustee who will properly take over trust administration. In addition, while tax planning strategies are best carried out using certain types of trusts, creation of a revocable trust is not essential for implementing these strategies, as tax saving trusts (marital and exemption trusts) can be created in a Will as well. The assets of a revocable trust, at the settlor’s death, are subject to federal and state death taxes in exactly the same way as the assets passing under the terms of an estate plan carried out through a will.
Many people hear horror stories about the court probate process and the expenses and delays involved, and friends and relatives urge them to execute a trust. Both a Will and a trust are complex legal documents that serve various purposes for various people. It is important therefore to determine – on an individual basis – what is the best estate planning vehicle. Some important reasons to use a trust are: if you own real estate or business assets in more than one state, if any of the beneficiaries you name need special considerations for managing or distributing their inheritance, if your estate exceeds the federal or state exemption equivalent and will therefore be subject to estate tax at death or in the future, and it will therefore advisable to incorporate estate tax planning sub-trusts for long-term tax savings; or if you wish to defer the distribution of any estate assets to one or more beneficiaries. It is advisable in any of these circumstances to discuss the use of a revocable trust.
