Who Should Have a Revocable Trust?
- Mary Vandenack
- Trust and Estate Planning
What is a Trust?
A trust, in general, is an arrangement whereby a party called a trustee holds, invests, administers and distributes property to or for the benefit of the creator of the trust (the settlor), his or her spouse if one, his or her children and descendants, if any, or other beneficiaries. The trust is a fiduciary arrangement whereby the settlor provides detailed directions regarding the management of the settlor’s property.
There are two broad types of trusts. One is referred to as a testamentary trust. A testamentary trust is a trust that is created pursuant to your will. Your Will specifies all the terms of the trust. The trust does not come into existence until after your death. If your Will fails, the testamentary trust fails. A testamentary trust may require court supervision and approval by a county court. Such supervision can be expensive. In addition, the terms of your trust become public record.
The second type of trust is referred to as an inter vivos trust. Such a trust is established between living persons through a separate the trust document it the trust comes into existence immediately upon execution of the trust rather than at the time of death through a will.
What is a Revocable Trust?
A revocable trust is an inter vivos trust that can be revoked, changed, or amended at any time by the person who created the trust. A revocable trust can be contrasted with an irrevocable trust which cannot be changed without following specific statutory procedures or obtaining a court order. The person who creates a revocable trust is typically referred to as a settlor or a grantor.
What are the purposes of a Revocable Trust?
Revocable trusts have a variety of purposes.
Avoiding probate
One purpose can be to avoid the probate process. Probate is a formal legal process where the will of a deceased person is submitted to a court. The court appoints a personal representative or executor to administer the estate and distribute assets as intended by the testator or testatrix. While there are certain arguments for utilizing a probate process, probate is a public process, requires a court proceeding and can be quite expensive and time consuming. Additionally, the assets and dispositive intents of the testator/testatrix will be public record. At present, most states do not provide for sufficient redaction and security processes to protect the confidential financial information that is typically submitted in a probate proceeding. A revocable trust can avoid the probate and often result in quicker and more efficient distribution of an estate.
Privacy
Many people creating testamentary documents desire and have reason to prefer privacy with respect to their testamentary documents. Although there has been a historical tradition of naming revocable trusts with the name of the settlor of the trust, a trust can be named anything. For example, James Johnson could create a revocable trust and call it “Volde’s Gaslamp Trust.”
Incapacity Planning
The incapacity planning aspects of revocable trusts are often overlooked. Yet, the incapacity planning aspect of the revocable trust can be one of the most important advantages of such a trust. While incapacity planning may seem more important for someone with a chronic illness or who is aging, anyone can become ill or sustain an incapacity of some sort at any time. In the event of incapacity, it is important to have ready access to assets.
Some planners suggest naming a power of attorney to transfer assets to the trust in the event of incapacity. There are a variety of issues with this approach. First, it is possible that your power of attorney could be deemed stale or ineffective. Second, your attorney-in-fact may be incapacitated and there is no successor who can act. In either event, someone will have to seek a conservatorship (another expensive and public approach) to transfer your assets to trust. If you are incapacitated, you may not know who will act, if anyone. Additionally, to the extent that you are incapacitated and your attorney-in-fact is a family member or loved one, they are likely most interested in being with you rather than figuring out what your assets are and how to transfer them to your trust at that moment. Consider making the job of your attorney-in-fact easier by funding your trust at the time you create the trust. This is simple. You title your checking account as “James Johnson, Trustee, of the James Johnson Trust.” You title your home and your investment accounts in the same way. (Life insurance and retirement accounts are different.) If you, James Johnson, become incapacitated, the successor trustee simply provides a certification of trust and steps into your shoes with respect to the trust assets. Such trustee has a fiduciary duty to act in your best interest and the trust provides clear rules about how you are to be provided for while incapacitated.
More on Funding the Revocable Trust Rather than Relying on a Power of Attorney
Trustees typically have more authority pursuant to a trust than an attorney-in-fact does pursuant to a power of attorney (although it is possible to give a lot of power to an attorney-in-fact). Your trust can specifically provide details of that authority. In a revocable trust, it is easier to create doublechecks in the form of trust protectors, co-trustees or special advisors.
Powers of attorney are often drafted to be “durable”, which means the attorney-in-fact has authority even while you are currently competent. One of my personal saddest stories was learning that a 92 year old woman I represented had turned over her finances to her son, who spent her money on himself and failed to pay her bills. I got a call from her assisted living facility telling me that they were going to have to evict her for non-payment. I’m the one who had to tell this woman that her son had spent her money. She died two weeks later and that’s the last time I ever drafted a power of attorney that didn’t involve doublechecks.
Financial institutions frequently refuse to accept the power of attorney prepared by the principal’s attorney. This happens despite legislation over the past several years requiring that they do so. Trying to get an attorney-in-fact added to an account can be tedious with many financial institutions. If the accounts are titled in trust, it is rarely an issue to achieve a transition to a successor trustee.
What’s Wrong with Just Adding Someone to My Accounts?
A common request by an aging client is to simply add someone to his or her accounts. At a point in time, banks allowed for convenience signatures but most typically, when someone is added to an account, he or she is made a joint owner. This approach results in the accounts automatically transferring to the joint owner upon the death of the account owner, which may or may not have been the intention. Additionally, to the extent you add someone to your accounts, your accounts may become subject to the liabilities of the person you added. By way of example, assume you added a friend as a joint owner and she is suddenly going through a divorce. You may have made your account an issue in your friend’s divorce.
The Complication of Using Transfer on Death Designations
Some planners will suggest that you can avoid probate and transfer your assets to your trust by using transfer on death designations. This is correct but doesn’t address the issue of incapacity. If you have established transfer on death designations with regard to real estate and investment accounts (other than qualified accounts such as IRAs), there are various issues that may arise. What happens if the transfer on death provisions were not completed correctly? The assets may not end up in your trust. You might have an estate that you weren’t expecting. Additionally, there are issues with insurance coverage on transfer on death assets. By way of example, in the Eighth Circuit, there was a case where a disgruntled ex-spouse of the decedent burned down the house of the decedent four days after his death. The house passed by transfer on death to the decedent’s niece but it was burned down before the niece even knew that the house had burned down. The insurance company determined that the niece did not have an insurable interest in the house. Many states are trying to address the issues of insurability of assets transferred on death but this has not yet been accomplished in all instances.
Transfer on death accounts are also subject to a high rate of “interference with testamentary intent” via contractual designations. If all assets flow through your trust and your trust provides detailed dispositive provisions, your goals are more likely to be achieved. To the extent that you use beneficiary designations or transfer on death provisions, naming your trust as the beneficiary will have the best chances of all expenses being paid and your dispositive desires being satisfied in accordance with your directions. IRAs, in certain instances, may be an asset to consider passing outside the trust due to income tax consequences related to IRAs being a unique asset for purposes of passing on death.
Separate Assets
Asset protection is a significant aspect of estate planning. By titling assets in a revocable trust, you create a clear record that the assets are your assets. This is helpful in the event that a creditor seeks to pursue your assets claiming that another, such as a spouse, beneficiary, or business partner, has an interest in the assets.
Income Tax Planning
Income tax planning is also an important aspect of estate planning. It is common for practitioners to set up trusts subject to the law in which you are a resident; however, there are other options. States other than your state of residence should be considered for a variety of reasons.
Estate Tax Planning
Trusts have the best potential to reduce and minimize federal and state estate and inheritance taxes. This is true whether you are single with no children, single with children, married with no children, married with children or any other such situation.
Trusts Allow For Disclaimer Planning
Beneficiaries of a trust may have reason to disclaim an inheritance. By using a revocable trust, you can create a structure that provides where a disclaimed asset will land. A disclaimer can be effectuated outside of a trust but the rules are established by statute rather than by you.
By way of example, assume a grantor names a friend as his beneficiary. After the trust was created and immediately prior to the grantor’s death, the beneficiary inherited $20 million. As a result, the beneficiary wants to disclaim the assets that the grantor directed to him. If the grantor includes a provision that the successor beneficiary will be a charity, then the beneficiary can disclaim and have the assets pass to charity. If the grantor had named the successor beneficiary as the children of beneficiary, the beneficiary could disclaim, let the assets pass to his children and achieve a generation skip for estate tax purposes.
Out of State Assets
It is common for individuals to own property in more than one state. If an individual lives in Nebraska and owns property in Iowa as well as Nebraska, when she dies, there will be a probate in Nebraska as well as an ancillary probate in Iowa. Using a revocable trust can avoid probate in other states.
Who Should have a Revocable Trust?
A revocable trust is an excellent tool for just about everyone. It works just as well for those with smaller amounts of wealth as it does for those with large amounts of wealth. While trust design will differ based on dispositive desires, asset structure, and state law, the concept of the revocable trust will achieve various objectives for anyone effectuating an estate plan.