What is a Revocable Living Trust?
A revocable living trust, put simply, is a method of transferring your assets to other people after you pass away. However, there is far more to it than that. A will can transfer your assets upon passing away as well. This article will examine how a revocable living trust differs from a will and how to operate one.
One of the classic examples of a trust is if you were to give $10 to your neighbor to hold until your son got home, at which time your neighbor should give the money to your son. As simple as that is, that is a trust relationship.
Structure of a Trust
To start off, it is important to understand what a trust is. A trust is a legal device where there is an owner, a beneficiary and a grantor. The owner is simple. That's the person who "owns" the trust assets. The owner is also called a trustee.
The beneficiary is the person who receives a benefit from the trust. You've probably heard of trust babies? Well, in that case, those kids are the beneficiaries as they receive a benefit from the trust assets. In the case of a living trust, the beneficiary will change through the life of the trust. In a living trust, the original beneficiary is the original owner of the assets, or the grantor.
The grantor is the person who owned the assets before they were placed in the trust. In the case of living trusts, this person is also the first beneficiary during his or her life. That's the reason they are called living trusts.
So, the trust is a triangle with a trustee (owner), a beneficiary, and the grantor. In a revocable living trust, these three can be the same person and frequently are for simplicity reasons. The trustee must abide by the rules of the trust document when providing for the beneficial use of the beneficiaries. If the trust says the beneficiary may only use the assets to buy ice cream, then the trustee may not allow the assets to be disbursed for any reason other than to buy ice cream. That's an unlikely situation, but demonstrates the power of trusts. The trustee must always follow the trust rules.
Rights of Beneficiaries
By default, a beneficiary has no rights to the trust assets. Every right the beneficiary has must be created in the trust document. Therefore, beneficiaries cannot compel a trustee to pay him or her unless the trust allows for that sort of control. This is actually a very important thing to note because courts will never grant beneficiaries more powers than are clearly stated in the trust.
Some typical powers granted to beneficiaries include the right to replace a trustee, right to income from the trust on set terms, right to assign his or her rights to the income, right to receive accounting statements from the trustee and the right to designate a successor trustee.
For revocable trusts, the grantor always has the right to take the assets back. That's why it is revocable. Similarly, he or she has the right to modify the trust document as needed. Almost always, once he or she passes away, the trust becomes irrevocable and the beneficiaries no longer have that power.
Rights of Trustee
By default, a trustee must do what is demanded by the grantor. In order for that to be clear and binding, those instructions are written down in the trust document. A large portion of the trust includes powers, rights and responsibilities of the trustee. These include items like the right to invest the property, right to make distributions as needed, discretion to withhold distributions as needed, and many many more.
The trustee is also bound by a duty of loyalty and a duty of care to the trust itself. The beneficiaries can make a claim in civil court if the trustee violates one of these duties or reaches beyond his or her power.
Power of Trusts
We mentioned earlier the power of trusts, but what exactly does that entail? For starters, trusts can designate any number of beneficiaries to receive from the trust, but this is no different from a will. Additionally, a grantor may place limitations on if and how a beneficiary receives a distribution from the trust, but once again, so can a will. For example, you're permitted to put in your will or trust that if Bobby is addicted to drugs or alcohol, he may not receive any distributions under this trust or will. That is perfectly fine for either device.
What is unique about a trust is timing. Wills happen all at once. They may create a trust in their execution, but they still are said to take point at a single point in time. Trusts may last for a very long time, and sometimes can last forever. So, you may set up a trust to pay your nephew $5 per month for the next 75 years after your death, but a will can only give your nephew the $4,500 outright, or set up a trust to do the monthly payments. Trusts are also used when passing assets to a minor. Technically, he or she could not receive the assets otherwise, so a trustee is chosen to hold the assets for the minor child. It is a way of separating ownership from control. When you start looking at irrevocable trusts, you start to see just how powerful these instruments can be.
Another thing that separates a trust from a will is the fact that all wills, absent a really good reason, are public record. That means that once you pass away, your will can be read by all. Your relatives can go in and read what you left your children or other beneficiaries if they wanted to. Many people don't like this public nature, so they opt to use a trust instead. The problem lies in proper execution of the trust to prevent this from happening.
My personal favorite aspect of trusts is the power to create incentive trusts. This means that you can reward behaviors after you've passed away. A common use of this is the payment to a grandchild who graduates college, but the law school favorite was when a trust paid the daughter of the grantor only after she divorced her spouse. Yes, you can require a person to divorce another before receiving any money under a trust because it can happen over time. This wouldn't be possible in the same way under a will. In the will, you can pay her if she has already divorced her husband, but cannot wait to pay her like you can in a trust.
Proper Execution of a Living Trust
Once a living trust is created and signed, it is technically complete; however, it is somewhat of a worthless device if you don't transfer all of your assets over to it. Yes, this means you will have to sign over your house, car, retirement account, bank accounts, etc to the trustee. In a typical living trust, this will look something like this: I, Richard Bobholz, hereby transfer my house to Richard Bobholz, trustee for the Richard Bobholz Living Trust. This would of course need the identifying factors for the house, a deed, more identifying factors for the trust itself and it all must be signed, twice. The formalities are actually quite simple once you understand the structure and purpose of a trust. You're signing once as the original owner of the asset and then again as trustee of the trust. You wear two hats in this transaction, but it is legally correct. If you have a different trustee than yourself, obviously that person would sign instead of you for the trustee position.
In your trust, you're going to want to transfer any assets that would pass inside of your will. That is basically everything you own except for jointly owned property, life insurance and anything payable on death or with a successor beneficiary.
Any Living Trust will also be followed up by a will for the creator. The will should assign anything that wasn't already transferred to the trust into the trust. It's called the residual will where the only assignment clause will read something along the lines of: "I leave my residue to Richard Bobholz, trustee for the Richard Bobholz Living Trust." Generally, you'd want to use the successor trustee or just leave it as the Richard Bobholz Living Trust and force your executor to figure out who the trustee is.
On Death of Grantor
What makes a living trust unique is the fact that the grantor is also the original beneficiary. During the time he or she is alive, the trust makes distributions to the grantor and the grantor always has the right to take all the assets and dissolve the trust. This means that grantor has an awful lot of power, and the assets are still considered the property of the grantor for all legal purposes like taxation and creditor laws.
When the grantor dies, the trust will have instructions for what to do; otherwise, it isn't a living trust. The trust will either distribute all the assets like a will would do, or it continues living as an irrevocable trust. Obviously, the beneficiaries are no longer able to reach in and grab the assets; rather, they must be distributed to them by the trustee. The trustee, now, may not be a beneficiary. If the grantor was the trustee, the successor trustee must be found and notified that he or she is now responsible for the trust assets, and he or she must transfer all of the assets into his or her name as trustee of the trust. This is the part that is complex because you have to demonstrate to banks, the Department of Motor Vehicles, the Register of Deeds and many other entities that you are rightfully taking possession of the assets of the trust. If you had a trust company handling the assets or you transferred trustees before death, this would be far simpler.
What is helpful for this process, and included in many professionally created trusts, is a trustee designation page. This page is a one page document that contains all of the information that any entity needs to know in order to transfer the assets to the new trustee. Once this transfer is complete, the new trustee will follow the trust document in making distributions or liquidating the trust altogether.
Another common issue is finding all of the assets. Trusts that are well drafted and cared for will contain a schedule of assets and proper accounting. Unfortunately, when the grantor is also the trustee, these tasks get ignored far too often.
All too often, attorneys will push living trusts on clients who would be fine with a will because living trusts cost significantly more to set up, and that is billable hours for the attorney. I pray this hasn't happened to you, and I urge you to have a solid reason why you want the trust opposed to the will when doing your estate plan. After all, there are many reasons why you may want a trust, but none of them should be because the attorney said so.
Also, keep up with the formalities if you do set up a Living Trust. They are more of a struggle than the probate process if they're not properly cared for, and that is not something you want to leave for your family.
Disclaimer: The purpose of this article was for educational purposes only, and was not created to be legal advice nor create an attorney client relationship. If you need an attorney, please contact one.
I've enjoyed sharing my knowledge, and I hope you learned something. If I can be of any help, please comment below or visit my webpage www.bobholzlaw.com.