What Is a Revocable Living Trust?
“The revocable living trust is established by a written agreement or declaration that appoints a trustee to manage and administer the property of the grantor. As long as you’re a competent adult, you can establish an RLT. In essence, the trust is like a rulebook for how your assets are to be handled when you die.” ~ Investopedia
· Can the federal estate tax be reduced or eliminated?
There are strategies that can be used to reduce or eliminate federal estate taxes. However, many of these strategies will not always work with a will-planning probate estate plan. This is because the people who draft such plans usually do not coordinate all of the estate’s assets but, rather, deal only with the property in the name of the will maker. As a result, major assets such as retirement benefits, life insurance, and joint tenancy property are not included in the plan.
You can easily design a living trust to coordinate all of your assets under one or more subtrusts and thereby take the assets into account in maximizing federal estate tax planning.
· How can I make sure that my beneficiaries do not have to use their own money to pay taxes on what they inherit?
A well-drafted trust or will contains a tax apportionment clause that dictates what assets shall be used to pay the estate taxes. Typically, all estate taxes will be paid before there is any distribution to beneficiaries so that all bequests are received free of the obligation to pay additional estate taxes.
An estate tax is a tax on the transfer of assets from an estate; this is true of the federal estate tax. Some states, however, have an inheritance tax. This type of death tax is imposed on the property an heir or beneficiary receives from an estate. Planning for beneficiaries living in these states is tricky and should be addressed in the individual’s estate plan.
· Specifically, what can my spouse and I do to reduce the estate tax burden on our children?
In general, you and your advisors can create:
· Marital and family trusts in your will or living trust that will shelter up to $2 million of your property if you both die after 2006
· Irrevocable life insurance trusts to shelter your life insurance from tax
· Family limited partnerships that reduce the value of your assets for estate tax purposes
· A current program of making gifts to loved ones or charity
· How do I most effectively avoid a living and a death probate?
Through a revocable living trust, living and death probate proceedings can be totally avoided. You may incorporate instructions into a revocable living trust which specify how your disability trustee should manage your assets if you become disabled. This simple procedure allows you to have the benefit of your assets, consistent with your directions, during the period of disability while avoiding the expense, delay, and lack of privacy imposed by the living probate process.
Similarly, a revocable living trust enables you to leave instructions for your death trustee, indicating how assets should be distributed. Because the assets are titled in the name of the trust, you avoid the expense, delay, and lack of privacy caused by a death probate.
· How can life insurance policies be totally protected from both probate systems?
The best way to totally protect your life insurance policy and proceeds from both probate systems is to designate a revocable or irrevocable living trust as both the owner and the beneficiary of your life insurance policy.
· My husband is not well: his memory and his mental acuity have degenerated over the last several years. If I die before my husband, how can I allow him the dignity of his independence and still protect him from the problems related to his failing health?
With a funded living trust as the center of an estate plan, a trust maker can select a cotrustee to serve with the spouse as trustees of the trust. This enables the surviving spouse to retain control and independence while having the advice and counsel of the cotrustee.
In the event that the surviving spouse’s health further degenerates, the trust can provide for a smooth transition in the management of his or her affairs. For example, a son or daughter could be named to serve as cotrustee with the father. The selection of a family member provides personal consideration as well as the security of joint management for the ailing spouse.
· What is a revocable living trust?
A trust is a contract between its maker and a trustee. In the contract, the trust maker gives instructions to the trustee concerning the holding and administering of trust assets. These instructions specify how the assets are to be held and distributed during the maker’s good health, upon his or her disability, and ultimately upon his or her death.
With a revocable living trust, a person can be (and usually is) both the maker and the trustee. A husband and wife will often be joint trust makers and joint trustees of a joint trust.
The term “revocable” refers to a set of powers that are typically listed in the trust agreement which specify that the trust maker has the power to amend or revoke the trust. Upon revocation, the trustee is directed to return all trust assets to the trust maker. In addition to having the power to amend or revoke, the maker has the power to place assets into the trust, remove assets from the trust, make all investment decisions concerning trust assets, and control and direct all payments and distributions from the trust.
· What is the difference between a revocable trust and an irrevocable trust?
As its name implies, a revocable trust can be revoked, changed, or amended by the maker of the trust at any time. Its maker can update it as his or her desires and the needs of loved ones change. This flexibility makes a revocable living trust an ideal foundation for almost all estate plans. A revocable living trust can be designed to control all of the maker’s property, totally avoid the probate of the maker’s estate, and maximize federal estate tax savings.
Irrevocable trusts, on the other hand, cannot be altered or amended without the approval of a court. Accordingly, irrevocable living trusts should be used only in certain circumstances after careful consideration and planning. Most often, irrevocable living trusts are used in conjunction with revocable living trusts to hold certain, select assets of the trust maker for the benefit of the trust maker’s loved ones. If the trust maker retains no rights in the irrevocable living trust and is not a trustee or a beneficiary of the trust, the assets of the trust can be excluded from the trust maker’s gross estate for estate tax purposes. This allows the trust maker to lower and, at times, eliminate federal estate taxes.
Irrevocable living trusts can be described as an advanced estate planning tool. They are most commonly used by individuals whose gross estates are taxable for federal estate tax purposes. Unlike revocable living trusts, irrevocable living trusts are rarely the foundation of one’s estate plan but, rather, a supplement to it.
What is a testamentary trust?
A testamentary trust is a trust created by a will. This will-created trust designates a person to serve as trustee, names the beneficiaries of the trust, and includes directions on how assets are to be administered in the trust. The key feature of a testamentary trust is that it does not automatically take effect upon the death of a decedent; it can become effective only if the will creating the testamentary trust is admitted to probate.
Unlike a revocable living trust, a testamentary trust, in some jurisdictions, may be subject to court supervision until all assets have been distributed and all trust purposes have been completed. For example, the trust instrument that creates a revocable living trust may require that the trustee provide annual accountings of the trust’s administration to the beneficiaries. In the context of a testamentary trust, the trustee may be required not only to provide the annual accountings to the beneficiaries but also to present the annual accountings for review and approval by the probate court. The presentation of such accountings for court approval necessarily involves the participation and expense of an attorney. These court expenses are normally avoided in accountings prepared for a revocable living trust.
How does a living trust differ from a testamentary trust?
Living trusts, also known as inter vivos (“during your life”) trusts, are created and in force during your lifetime. You sign the trust agreement and place the assets you choose in the trust while you are alive. The trust survives both your incapacity and your death, distributing the assets of the trust during your incapacity or after your death to your loved ones in the manner you have specified in the trust agreement.
In contrast, a testamentary trust is created within a will and thus is not in force during your lifetime. Since a testamentary trust does not exist until the will takes effect at your death, you cannot place any assets in the trust during your life. Hence, your assets must go through the probate process before being placed in the testamentary trust.
What is the difference between a living trust and a living will?
A living will is an important part of your estate plan because it allows you to preplan for very sensitive personal issues that affect you and your loved ones. It directs your physician to discontinue life-sustaining procedures if you are in a terminal condition or a permanently unconscious state. Each state has its own statute that provides specific guidelines and language that can or should be included in your living will.
A living trust deals with your financial affairs rather than with health care issues. With a living trust, you can give instructions about what is to happen to your assets when you are no longer able to manage them yourself, whether due to incapacity or to death. A revocable living trust allows you to keep control over what happens with all of your assets even when you yourself are no longer able to make decisions about them.
Isn’t creating a revocable living trust just a waste of time and money if my estate is not subject to estate tax?
Absolutely not. Your estate will pass estate tax—free on your death, but there is more to planning than taxes. In fact, many personal benefits in a revocable living trust may be significantly more important than estate tax savings. Let’s go back to the beginning and look at our definition of proper estate planning:
I want to control my property while I am alive and well, care for myself and my loved ones if I become disabled, and be able to give what I have to whom I want, the way I want, and when I want, and, if I can, I want to save every last tax dollar, attorney fee, and court cost possible.
You will notice that a lot of goals precede the concluding phrase, “and, if I can, I want to save every last tax dollar.” It is those preceding goals which have priority in proper estate planning.
For many people who do not have taxable estates, a revocable living trust is an excellent planning vehicle because, among other things, it can address so many different needs. In creating a revocable living trust, you can, for example, do the following:
· You can provide for your disability by appointing someone to administer your assets while you are disabled in accordance with your detailed instructions on how to care for you and your loved ones.
· You can create a special-needs trust to take care of anyone in your family who may have a temporary or permanent disability or who may require special care.
· You can create a common trust to care for your minor children from a common pool of the estate assets, just as you would if your family were still intact.
· If some of your heirs are poor at handling money, you can arm a successor trustee with spendthrift provisions to restrain your heirs from their unwise spending or to provide protection from the claims of their creditors.
· You can delay distributions to heirs until they are mature enough to spend their inheritance wisely.
· You can avoid the public, slow, and expensive probate process.
· You can direct the disbursement of your estate in a manner tailor-made to the individual needs and capabilities of each of your heirs.
· If you have contentious family members, you can reduce the likelihood of legal conflicts among them, since a revocable living trust is generally more difficult to contest than a will.
These are just a few examples of the things you can accomplish with a revocable living trust. When you remain mindful of the real priorities in estate planning, you will never choose a planning vehicle solely on the basis of the size of your estate.
Is living trust planning a good idea for a single parent?
Definitely. In fact, it is the best overall solution to the planning problems of the single parent. How does a living trust benefit the single parent? In most respects, it offers the same advantages to a single parent as it does to a married parent. However, because there is no spouse to assist the parent if he or she becomes disabled or to provide for the emotional and financial needs of the child if the parent should die, living trust planning is particularly beneficial for a single parent. Carefully selected guardians and trustees and detailed instructions for your own care and that of your child will ensure that, no matter what life brings, your wishes will be carried out and your child provided for.
· What is the income tax effect of a revocable living trust?
A revocable living trust is tax-neutral in that the trust maker is considered the owner of all trust assets during his or her lifetime for tax purposes.
· What happens to the trust at the death of its maker?
At the trust maker’s death, the trust may continue according to its terms or may be terminated with the trust assets’ being distributed to the beneficiaries.
· Can I have more than one revocable trust?
Yes, you can. For instance, if you plan to be away from the office for an extended period of time, a separate revocable trust can be set up so that you can appoint someone as your trustee to handle the regular business routines of paying bills, depositing checks, and the like, while you are away. This type of trust is like a power of attorney but is safer and more restrictive.
You can also divide property among several revocable trusts and appoint a different member of the family as trustee of each trust to see how each one manages the trust property. This will give you an idea of what would happen in the event of your death. In addition, you can have the sole power to amend or revoke each trust, so that you can terminate a trust if you feel that the principal in it is being mishandled. In some cases, spouses may each have an individual trust for separate property and a joint trust for marriage property.
· I’m afraid I’ll lose control of my assets if I don’t own them any-more. Why do you say I won’t lose control?
First, you create a trust agreement with the help of a qualified estate planning attorney, who makes sure the document fulfills your wishes while staying within the bounds of trust law, debtor-creditor law, marital law, bankruptcy law, and tax law. Among the provisions of your trust are your instructions for the trustee in regard to managing and distributing the assets for and to your beneficiaries—you dictate the terms which the new owner of your property (your trustee) must obey. There is no higher duty under the law than that owed by a trustee to a beneficiary.
As if that were not enough control, you can be the sole beneficiary of the trust during your lifetime. Your trust will contain instructions on how to take care of you during a legal incapacity, and your instructions must be followed and your property used for your benefit. If you become disabled, you actually have more control over your property than you would have if you owned it outright, since without the trust your assets would be subject to a living probate.
And finally, for the ultimate in control, you can be your own trustee while you are alive and competent. You make all the decisions to buy, sell, give away, acquire, and use the property, just as you always did.
· How does a revocable living trust avoid probate?
Regardless of the specific types of property that a decedent may have, all property will be either probate or nonprobate property. Probate property is all the property that must pass through the probate process to change ownership. Nonprobate property is all the property that does not need to go through the probate process to change ownership.
Typically, probate property is property that the decedent owned in his or her own name. Nonprobate property is property that passes to a named beneficiary, such as a life insurance policy, annuity contract, certificate of deposit, or individual retirement account. It also includes property that was owned by the decedent in joint tenancy with rights of survivorship.
Property held in a revocable living trust is nonprobate property because it is not directly owned by the trust maker. Since the property is no longer owned by the maker in his or her individual name, it does not need to pass through the probate process to have the ownership changed. This transfer of ownership from the individual to the trustee of the trust is referred to as “funding” the trust.
Any time a revocable living trust is used, it is extremely important that it be funded. All assets left outside the trust may have to pass through the probate process to change ownership. Trust makers should periodically review their estate plans and their assets to make sure that they are owned correctly and that the appropriate assets are placed in the trust.
· I understand that the probate process is public. If I had a revocable living trust, would everyone still know my affairs?
No. Unlike the probate process, a living trust is not public and does not warrant public attention. In some states, such as California, the trust may be open to inspection by your “heirs at law” or other “interested persons,” but it does not need to be filed in the public records.
· Does a living trust avoid an ancillary probate?
When a revocable living trust is properly funded, neither probate in the state of domicile nor ancillary probate proceedings are necessary because the assets are held and owned by the trust.
· If my state has simplified or informal probate laws, should I still consider creating a living trust?
All states differ as to the formality of their probate laws. Many states have adopted a probate law that reduces some of the requirements of traditional probate (e.g., court hearings). Even though your state may have informal probate, certain procedures must still be dealt with, resulting in significant cost, delay, and frustration. Additionally, a probate that begins as an informal process can instantly become a very formal probate once the slightest problem occurs. Even if your state has an informal probate process, you may own real estate in a state that has formal probate, and the probate laws of that state would apply to the real estate. A revocable living trust can avoid all probates.
· Is my living trust something that the government will shut down?
The living trust has been authorized by common law for hundreds of years and is growing more and more popular. The trend for the federal government has been to liberalize the use of living trusts, giving them equal footing with probate estates. For example, in 1997, Congress enacted legislation allowing equal treatment of living trusts and probate estates for most income tax purposes.
State governments have followed the federal trend of enacting legislation favorable to the use of living trusts. However, there is no telling whether the states will decide to exert more control over living trusts. Living trusts expedite the transfer of wealth without the usual red tape. In the absence of any special-interest group trying to pull living trusts into the probate system, it is unlikely that state governments would want to create more probates or conservatorships; the courts are overcrowded as it is.
· Does a revocable living trust always have assets in it?
A revocable living trust may be unfunded, partially funded with only specific assets, or fully funded. If a revocable living trust is unfunded or not fully funded, the trust maker’s assets that are not held in the trust will pass to the trust in accordance with a “pour-over” provision in his or her will. These assets will be subject to probate.
· Can I keep some of my property outside of my trust?
Yes, you can. But any such assets will have to go through the probate process which the trust is set up to avoid.
· Are assets held in a living trust protected from creditors’ claims?
Generally speaking, when assets are held in a revocable trust, they are not protected from the legitimate claims of the trust maker’s creditors. This is because the maker can revoke the trust and take back the trust property at any time. The law finds that it is inequitable to allow the trust maker to have this control and full use and benefit from the trust property while denying creditors the power to compel revocation in order to satisfy their just claims. An irrevocable trust may provide some creditor protection because the maker is not able to revoke the trust and get the property back. The maker may have a beneficial interest in the trust, such as a right to income or to principal, and that interest may be reached by the maker’s creditors. However, if the beneficial interest is subject to the discretion of the trustee and the maker is not the sole trustee, creditors can be thwarted. In fact, two states, Alaska and Delaware, allow trust makers of certain irrevocable trusts to retain rights in the trust and still have the trust assets be free from creditor claims.
· Are there ways to draft my living trust so that the trust assets are less vulnerable to my beneficiaries’ creditors?
While a revocable living trust cannot protect the maker from his or her creditors, it can protect the beneficiaries from the claims of their creditors. ‘When a special clause is inserted into the trust document to protect trust assets from claims of the beneficiaries’ creditors, the trust is said to be a spendthrift trust.
Spendthrift trusts are not valid in all states. In addition, the mere presence of a spendthrift clause does not always ensure creditor protection. There are, however, several measures that can be taken to make a spendthrift trust less vulnerable if it is attacked by a beneficiary’s creditors. For example, trust agreements may specify that the trustee must make distributions for the support of the beneficiary or that the trustee may make distributions based solely on the trustee’s discretion. Courts have generally held that spendthrift trusts which require that distributions be made for the support of the beneficiary may be reached by creditors for support-related debts; creditors generally cannot seize assets of a spendthrift trust that allows the trustee to distribute trust assets based solely on the trustee’s discretion.
If your objective is to protect your beneficiaries from their creditors, it is generally best to give the trustee of the spendthrift trust sole discretion as to whether or not to pay the trust’s income or principal to the beneficiary, as opposed to requiring mandatory payments of income or principal to the beneficiary. Additionally, it is not advisable to name the beneficiary of the spendthrift trust as the sole trustee of his or her own trust. Doing so could invoke the doctrine of merger of equitable and legal title, thus allowing the beneficiary’s creditors to reach the trust’s assets.
Creditors could also reach the assets of a spendthrift trust if the conditions necessary for the trust to terminate have already occurred but the trust has not been terminated. For instance, if the terms of the spendthrift trust require that the trust terminate when the trust beneficiary reaches 30 years of age, a creditor of the beneficiary may require that all assets be distributed to the beneficiary when he or she turns 30. The beneficiary cannot elect to wait out the creditor. To solve this problem, you can make the term of the trust be the duration of the beneficiary’s life.
· Is the cost of a will or a trust income tax—deductible?
Though the legal fee for drafting a will is generally not tax-deductible, a portion of the fee for the planning and drafting of a revocable living trust generally is. The maintenance, conservation, and protection of income-producing assets is deductible, subject to the 2 percent floor for itemized deductions.
· If I set up a revocable living trust, will it help me avoid taxes while I am alive?
No, a revocable living trust will not help you avoid taxes while you are alive. Because you still control all the assets, you still pay the taxes on the income from them.
· My bank is currently managing my assets under a trust arrangement. Isn’t the bank’s document a revocable living trust?
The agreement you signed with your bank may be a revocable living trust. A legal document sets forth the conditions which determine the nature of the legal relationship. If the document describes itself as a “trust agreement” and identifies the bank as your “trustee,” a legal trust relationship probably exists. Whether it is a revocable trust depends on the specific terms of the document. The phrase “revocable living trust,” as used by members of the National Network of Estate Planning Attorneys, signifies a very complete statement of your intentions that includes your best thoughts on providing for yourself and your loved ones. The bank’s document probably contains inadequate instructions in the event of your disability and no provisions for distribution other than to return the assets to your probate estate.
Trust documents prepared by banks for general usage are commonly known as letter trusts. Under these arrangements, you, as the maker, designate the bank’s trust department as your trustee but retain the right to revoke the trust arrangement. You are designated as the recipient of all the income. Your estate is designated as the beneficiary upon your death. No provision is made for your disability other than the continuation of income payments to you during your lifetime.
The purpose of the letter trust is to create a specific relationship between you and the bank. The bank is not authorized to be a broker or seller of investment securities. However, the relationship created by the letter trust agreement permits the bank, acting as your trustee, to invest on your behalf and to earn a fee for doing so. These trusts are not designed for estate planning; they are designed to expedite and make easier the bank’s investment of your assets.
You should consult your attorney about creating a fully developed revocable living trust as an amendment to the letter trust. In this way, your bank, continuing as your trustee, will have full instructions, in the event of your disability or death, for managing and distributing your assets.
Why do you recommend a revocable living trust as a basic strategy for proper estate planning rather than other traditional methods?
A revocable living trust—centered estate plan meets all the criteria in the definition of estate planning:
· It allows you to control all your affairs and assets during your life and after your death.
· It minimizes taxes, fees, and costs, thereby preserving your wealth.
If you procrastinate and do nothing, the courts will take control of your assets. When you die, your assets will be distributed according to state law; if you become incapacitated, they will be managed by a conservator. The outcome in either case may not be what you want.
With the traditional methods of planning, you can lose control. A will probably will not control all of your assets, and it does not avoid probate when you die. Furthermore, it provides no protection at incapacity. Joint ownership doesn’t avoid probate; it just postpones it. If a joint owner becomes incapacitated, the other joint tenant could end up in the probate court. Joint ownership can also cause the unintentional disinheritance of a tenant’s own family.
Beneficiary designations are not always effective either. They create problems if the beneficiaries are minors or are disabled or if they have creditor or marriage problems.
Finally, none of the traditional methods is particularly useful as a basic strategy for wealth preservation.
· If revocable living trusts are such an outstanding planning tool, why do attorneys either downplay their use or fail to recommend them to clients?
Most attorneys are required to take basic courses in wills and probate administration in law school. Trusts are, in many instances, an elective course. Even though the popularity of revocable living trusts as a basic planning vehicle has blossomed in the last 10 years, many schools and continuing legal education programs have failed to catch up with the public demand.
Many attorneys are also reluctant to recommend this planning tool since they believe it will mean less income for them. They mistakenly believe a relatively small fee for sophisticated planning now is not enough to forgo the eventual probate estate revenue. They fail to realize that clients will complete this planning elsewhere to avoid probate and obtain all the advantages of revocable living trust planning.