Revocable Living Trusts

  Trust  Basics

A trust is a contract: The parties to the contract are the Grantor (also referred to as the Trustor or Settlor), and the Trustee.  The trust contract (sometimes called a ‘declaration of trust’ or ‘transfer in trust’) also refers to one or more beneficiaries, who while not parties to the contract itself, benefit in some way from its terms.   Another way of putting it is that a trust is a legal arrangement that authorizes one or more people (the trustee) to manage property for the benefit of the beneficiaries. The terms grantor, trustor, and settlor are interchangeable (the term settlor is also used to designate someone who makes a will).  We will attempt to use the term grantor to refer to the creator of a trust throughout these pages.  The trustee administers the trust property and earnings for the beneficiaries of the trust according to the terms of the trust document. The trust document is simply a written agreement between the grantor and the trustee specifying details of trust management and payments to beneficiaries.


Types of trust.

Since trusts are simply a type of contract, various trusts can be designed to accomplish different objectives.  Trusts can be divided into two categories: revocable and irrevocable trusts. A trust is revocable if the Grantor can change his mind about the trust after it is established, and either modify it or revoke it altogether.  It is irrevocable if, once the trust is established, the Grantor cannot revoke it, and his ability to modify it is either extremely limited or nonexistent.  Trusts can also be categorized as either inter vivos or testamentary. Inter vivos trusts (also called living trusts) are those established by the Grantor during his or her lifetime. These trusts may be either revocable or irrevocable,  and may be designed to pay the trust's income to the Grantor during his or her lifetime. Inter vivos trusts begin functioning during the Grantor's life and often continue after death.  (After the grantor's death, if a revocable trust is not terminated, it  becomes irrevocable).  Thus, a revocable living trust is one which is formed during the Grantor's lifetime, and can be amended or revoked at any time up until the Grantor's Death.

Testamentary trusts are established upon the Grantor's death.  They usually are part of the Grantor's will, but may also be established by the terms of another trust.  (E.g., the Grantor can creates an inter vivos trust that, by its terms, established one or more testamentary trusts after the Grantor's death.  Testamentary trusts are by definition irrevocable, since the Grantor is no longer alive to amend or revoke it.     A marital trust is a particular type of testamentary trust.  It does not come into being until the Grantor's death, and is primarily designed to decrease the aggregate total estate taxes paid by a couple.

For most people of average means, having a Revocable Living Trust is the foundation of a sound estate plan. It allows them to be confident that their assets will flow smoothly to their heirs without passing through the hands of lawyer and judges in the event of their death.  The Revocable Living Trust is ‘transparent’ for tax purposes.  That is, it is not required to file tax returns or report information to the IRS.  From an IRS standpoint, a revocable living trust has no distinct identity.  The grantor continues to use his own social security number for trust assets such as bank and investment accounts.  

Although the Revocable living trust provides no asset protection while you are living, once you pass away it may offer asset protection for a surviving spouse and children, and it will provide protection from the most common threat to your family's property: the probate process.  Once you understand the probate process, you will realize why it should be avoided at all costs.

  Avoiding Probate:

Probate is a legal proceeding wherein a will is validated, the corresponding estate is administered, and guardianship issues are dealt with.  The important part of this definition is that probate is a “legal proceeding.”  That means lawyers, legal fees, billable hours, and generally charges made against your estate that will decrease the property you intended to go to your children or other heirs.  If you want to avoid probate, you do NOT want a will as the cornerstone of your estate plan.  Lawyers jokingly refer to wills they have drafted, and that are waiting for probate in their filing cabinet, as their “retirement plans.”  Law schools don't teach prospective lawyers how to help their clients avoid probate.  Why would they?  Probate is a major source of income for lawyers.  Ask anyone who has gone through the months and years of probate agony what they think of the process.  You too will want to avoid it at all costs.  

The important thing  to remember about the probate process is that it is wholly unnecessary.  Well planned estates that have been provided for using a TRUST (instead of a will)  can be often be settled in a matter of hours, rather than months and years of probate.  The rights of all creditors and beneficiaries can be assured through the use of a trust.  The only ‘losers’ in the process of estate administration with a trust are the lawyers.  And in all cases, the lawyers’ loss is everyone else's gain.

Revocable Living Trusts

The primary means of avoiding probate is to have a Revocable Living Trust instead of a will.  A Revocable Trust is a contract that you enter into that enables you to avoid probate.  Properly drafted, it also enables a husband and wife to double their unified federal estate and gift tax exemption, and to avoid some of the other adverse tax consequences of the death of a spouse. We will not go into great detail here about what a trust is, and how it works.  There is a wealth of information available about the many kinds of trusts.  The following is a brief overview of the Revocable Living Trust, and how it works.

The Grantor establishes a Revocable Living Trust by signing a Trust agreement.  Typically, the Grantor is also the original trustee.  Other trustees are named to take over after the death of the Grantor.  If the Grantor is married, the Grantor and his/her spouse are both co-trustees. The beneficiaries are those who the Grantor wishes to inherit his or her property, typically (but not necessarily) a spouse and/or children.  After the trust is formed, the Grantor transfers some or all of his property into the trust.  Generally, any property which is not effectively transferred into the trust will remain in the Grantor's estate to be probated.  Thus, to avoid probate, all of the Grantor's property must be transferred out of the Grantor's name and into the Revocable Trust, or to some other entity (such as a corporation or a limited partnership).  Even after the formation of a revocable trust, the Grantor retains total control of his property.  There are no income tax consequences to forming a revocable living trust, and no tax returns for the trust need to be filed while the Grantor is alive.

In addition to the Revocable Living Trust itself, when a qualified planner establishes an estate plan for a client, certain other documents are also included (or at least explained and recommended).  They include:

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A “pour-over” will: This is a will that gives any property that remains in your estate after your death (i.e., property that is still titled in your name at the time of your death) to your trust, and also provides for the guardianship of minor children. Providing for the guardianship of minor children is THE ONLY LEGITIMATE REASON to have a will at all.   If you have set up your estate plan properly there shouldn't be any property in your name which would remain to be transferred by a will, since this would put you back into the probate process.   Other than for the provision guardianship arrangements for minor children, the “pour-over” will should be included as a fail-safe measure in the event that property is mistakenly left out of the trust.

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Advance Directives: This is a general term referring to a number of written statements you can make which expresses your desires in the event that you are incapacitated, and cannot express them for yourself at a future date.  They include:

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Living Will: contrary to its name, this is not a “will” at all, but is instead a statement expressing your desire NOT to be put on life support equipment for the sole purpose of prolonging the moment of death.

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Power of Attorney (health care): This is a notarized statement granting another individual (usually the same person who is the trustee of your trust) the authority to make health care decisions for you in the event that you become incapacitated.

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Power of Attorney (financial): This is a notarized statement granting another individual the authority to make financial decisions for you in the event that you become incapacitated.

  Property Transfers

Any Estate Planning Professional who provides a trust as part of an estate or business plan should also provide all of the documents and information necessary to transfer the necessary property into the trust.  PROPERTY TRANSFER is one of the most important aspects of any type of estate or business planning.  The best trust in the world is worthless unless property is properly transferred into it.  This is where many planners who sell trusts fail their clients.  In general, all titled property must have that title transferred, and a new title issued in the name of the trust (or other entity that is part of the estate or business plan, such as a corporation or partnership).  For real property, this means that a deed transferring the property must be filed with the county clerk and recorder of the county in which the property is located.  For vehicles, the existing title must be signed over to the trust, and a new title issued.  For bank or investment accounts, the title of the account must be changed to indicate ownership by the trust, and a new signature card executed.  Stock certificates must be reissued in the name of the trust, which is the new shareholder.  Life insurance policies can have ownership transferred, beneficiaries renamed, or both.  IRA’s, which cannot be transferred into trusts, usually have the trust named as the beneficiary.  These are all things that a qualified planner will do for you, or give you specific step-by-step instructions how to accomplish.  A conscientious planner will always check to make sure that the property transfers have been accomplished.   Property transfer may seem complicated, but this is one of the reasons to work with a professional, qualified planner.  No matter how complex the property transfers seem, remember that they must be done once.  If you don't transfer your property into a trust while you are alive, and you don't lose your property to a creditor or through a lawsuit, a lawyer will do it for you after your death as part of the probate process . . . . and exact a fee more hefty than you can imagine.