© 2009 Justin Dituri
What is a trust?
Very simply, a trust is an arrangement between three people; the TRUSTMAKER (sometimes called the ‘grantor’ or in old-language the ‘settlor’), the TRUSTEE, and the BENEFICIARY. A trust is created when a trustmaker turns over property to a trustee, who holds it for a beneficiary.
One person can play one, two, or three of these roles. For example: In a situation where a mother or father sets up a bank account for a minor child, the parents are the trustmakers and the trustees, and the child is the beneficiary. (Accounts such as these are known as Uniform Transfers to Minors Accounts.) This is also an example of a common trust that many people set up (sometimes without realizing that they are establishing a trust!).
What makes a trust a ‘revocable living trust’?
There is nothing special or mysterious about “revocable living trusts.” It is actually very simple.
A living trust is any trust that is set up while the trustmaker is alive. The alternative is a testamentary trust, a trust that is set up when the trustmaker dies. A testamentary trust is set up if a person declares in their will that they want to leave property in trust for a loved one.
A trust is revocable if the trustmaker can go to the trustee after he or she has given property to the trustee and take the property back or change the terms on which the trustee makes distributions to the beneficiary. When a trustmaker creates an irrevocable trust, he or she cannot take the property back or make any changes to the terms on which distributions are made to a beneficiary.
So a revocable living trust is simply a trust that is set up while the trustmaker is alive, and that allows the trustmaker to take back his or her property or make changes to the terms of the trust.
It is very common in the revocable living trusts that people set up for estate planning, that the trustmaker is also the trustee and the beneficiary of the trust. For example, if you set up a revocable living trust and placed your bank account “in the trust,” you would change the name on your bank account to yourself as trustee of a trust for your benefit.
What is the difference between a revocable living trust and a will?
We have already looked at a revocable living trust. A trust is created when a trustmaker gives property to a trustee to hold for the benefit of a beneficiary, and in a revocable living trust often the trustmaker gives property to him or herself as trustee, for the benefit of him or herself as beneficiary.
In the world of estate planning the revocable living trust can solve two problems. First, who will handle and take care of your property if you are mentally incapacitated (disabled)? Second, who will take control of your property when you die and make sure that it goes to the people you choose? The revocable living trust “solves” the first problem by declaring a successor trustee, someone to act as trustee of the property if the trustmaker is mentally incapacitated. After all, if the trustmaker is mentally incapacitated how can he or she act as trustee? The revocable living trust solves the second problem by declaring who is to be the trustee, and who is to be the trust’s beneficiary, when the trustmaker dies.
It is important to understand however, that the successor trustees will have control over only the property that has the trust name on it. For example, Bill Sample owns a house and the deed shows “Bill Sample” as the owner; Bill also owns a bank account and the bank account shows “Bill Sample Trustee of the Bill Sample Trust” as the owner. If Bill becomes mentally incapacitated, whoever Bill has named as successor trustee of the Bill Sample trust will be able to take control of the bank account and use the money in the account to take care of Bill. But, because the house is owned by Bill, not by Bill as trustee of Bill’s trust, the successor trustee of Bill’s trust will have no ability to do anything with the house. In the same way, when Bill dies, the trustee of Bill’s trust will be able to get at the bank account money and give it to whoever Bill named (in the trust) to receive it. But, the successor trustee will not be able to do anything with the house.
A will on the other hand, is more
limited. In a will a person declares who
they want to take control of their property when they die and who they want to
their property to go to. Here in
Generally, a Personal Representative has no control over property that the deceased owned as joint tenants with another person or that was owned as part of a contract. When I say, “owned as part of a contract,” I mean things like life insurance, annuity contracts, IRA’s, or 401(k) plans. These are arrangements where the owner names a beneficiary to receive the property upon their death. The Personal Representative also has no control over any property in a revocable living trust.
Also, the Personal Representative must get permission from a District Court Judge to be able to take control of the deceased’s property. The process of getting this permission from a judge is what is known as “probate.” The successor trustee of a revocable living trust does not have to get permission from a judge to deal with any property in the trust.
In summary, a revocable living trust:
· Can provide a means for you to name a person to handle your property if you are mentally incapacitated;
· Can provide a means for you to decide who will receive your property when you die, and who will make sure those people receive that property;
· Only works with property that you own in the name of the trust; and
· Does not require the successor trustee to get permission from a judge (probate) in order to deal with the trust property.
On the other hand, a will:
· Provides a means for you to name a Personal Representative to control your property when you die and name who should receive the property;
· Only allows the Personal Representative access to your property after you die, not during any period that you are mentally incapacitated;
· Only works with property that you own in your own name alone, not with property you own jointly with another person, or as a contract, or that you own in a revocable living trust; and
· Requires the Personal Representative to get permission from a judge (probate) in order to deal with your property.
My CPA says I don’t need a trust because
probate is simple in
It is true
This statement might be true IF a revocable living trust cost more than a will AND you justified the additional cost because your family will save time and money settling your affairs if you have a trust instead of a will. But, a revocable living trust will not necessarily cost you more than a will, and whether you die with a trust or a will is not the determining factor in determining how much time or money your family will spend to settle your affairs.
I would say that if what you want is to minimize the time, expense, and hassle of settling your affairs when you die, then what you need is to work with an attorney who is committed to providing you the counsel and advice necessary to create a plan that will result in minimized costs for your family.
First, revocable living trusts don’t necessarily cost more than a will. Both wills and revocable living trusts are means for leaving instructions as to who will care for your property when you die, and for naming the people who will ultimately receive your property. The instructions are just words on paper, they are just word processing. Why should a pile of paper with the title “revocable living trust” cost more than the pile of paper with the title “will?”
These days you can buy software for your home computer that you can use to prepare do-it-yourself wills and trusts. The will drafting software costs the same as the trust drafting software. Some software packages are even capable of producing both a will and a trust, for one price!
How much you pay for an estate plan should depend on how important it is, to you, that you receive the counseling and advice that you need to fully understand what you are doing; what your options are and what is the best choice for you and your family.
Second, how much your family has to spend in time or money to settle your affairs will not necessarily be reduced if your instructions are in a trust, as opposed to a will.
If minimizing time and expense were simply a matter of your family avoiding the probate system, there are many ways to do this besides setting up a revocable living trust. A surviving joint owner of property does not need to use the probate system to transfer the property to him or herself. The beneficiary of life insurance, or an IRA does not need to use the probate system to have the life insurance company or IRA administrator pay a death benefit or death settlement.
In my experience, the time and expense of settling someone’s affairs are minimized if a family has good expectations of what must be done in the process, how they will do what must be done, and how much it is going to cost them to get it done. This happens best if the deceased left clear instructions, had organized what they own and how they owned it, maintained their plan over time, and if the family had a good relation with the deceased’s professional advisors.
in the answer to a previous question that probate is the legal process in which
a judge approves and grants authority to the Personal Representative named in a
will. Just being named as Personal
Representative in a will alone is not enough to be able to deal with the
deceased’s property. For example, Bill
Sample dies and has named his daughter Susan Sample as his Personal
Representative. If Susan goes to the
bank where Bill has an account (in his name only), and shows the will naming
her as Personal Representative, the people at the bank will not simply allow
her to have access or control of the bank account. They will want her to obtain from the court
Will I lose control of my property if I put it in a trust?
If the trust is a revocable living trust, and you are the trustee, the answer is “No.” If you are the trustmaker of a revocable living trust, and you give your property to yourself, as trustee, then you will retain control of it. You retain control of the trustee of the trust. You also retain control because, as trustmaker, you have created a revocable trust. Because the trust is revocable you have the power to have the trustee (you) return all of the property you gave to the trustee for the trust.
If I can’t be the trustee of my trust anymore, then what happens?
There are two situations where you may involuntarily have to stop acting as the trustee of your revocable living trust. One is if you become mentally incapacitated, the other is when you die. To prepare for both of these situations you should name successor trustees to take over as the trustee of your trust.
Your next question may be, “Who should I name as trustee?” The choice of trustee to care for your property while you are mentally incapacitated and to care for your property when you die should be made carefully. My experience is that most people immediately consider some family member. The clients reason that family members are familiar and believe they will take on the role out a sense of duty and not in order to make money.
But, you should consider that being a trustee is a great responsibility. The trustee of a trust (where the trustee is not also the beneficiary and trustmaker), has a duty to protect the trust property and use it only for the trust’s beneficiaries. A trustee must be very careful to keep any trust property totally separate from their own property. For example, a trustee cannot move the money in a trust’s bank account into their own bank account “because it would be easier to deal with it there.” If the trustee did that, it would be difficult, if not impossible, to keep straight how much of the money in the account belonged to the trust, and how much belonged to the trustee. The trustee must keep good records of all property that the trust started with, money paid to the trust, and any expenses paid out of the trust. So, anyone acting as trustee must have an ability to keep good records. A trustee should also be prepared to file a trust tax return.
For these reasons, it may be a good idea to have a professional act as trustee. A professional will, of course, charge a fee for this. However, the professional trustee will also be well prepared to do a complete, and thorough job of managing the trust assets. Another option is to have a family member, and a professional trustee, serve together. A well drafted trust will allow the family member and professional trustee to divide up the trustee duties. For example, the professional trustee could be responsible for trust administration (keeping the books and records of the trust), and for making distributions from the trust, while the family member could be responsible for determining how to best invest the trust assets.
It is also important to look at the conditions under which a successor trustee could be removed and replaced. Circumstances and conditions change over time, and a person who would be an appropriate trustee today, may not be appropriate ten years from now.
So, there are many options in choosing a successor trustee for your revocable living trust. This is where working with a good, counseling oriented, attorney will provide value for you and your family.
Do we have to file any special tax returns?
As long as you are acting as the trustee of a trust that you establish and that you are the beneficiary of, the trust may use your social security number. Any income from property in the trust will be reported on your income tax return. This will continue to be true even if someone is acting as your trustee while you are mentally incapacitated.
But, after you die the trust will be irrevocable. After all, you won’t be here to revoke or change the trust! At that time the trust will need its own taxpayer ID number from the Internal Revenue Service, and must file a separate tax return. The tax return for a trust is a Form 1041.
If I set up a revocable living trust how much will a bank charge to be trustee?
As long as you are alive and not mentally incapacitated and are serving as the trustee of your revocable living trust, there will be no reason to pay fees to any trust company. Even if you list a trust company to serve as a trustee in the event you can no longer serve as trustee, the trust company will not collect any fees as long as it is not acting as trustee. A trust company will only collect fees when it is doing the work of being trustee.
Mr. Dituri is a Colorado attorney who has limited his practice to estate planning issues for the last thirteen years. You may contact Mr. Dituri at 303-774-1976.