The Basics of Lifetime Revocable Trusts
Defining Features of a Revocable Trust.
Revocable Trusts (also called "living trusts") have continued their popularity as an alternative to a traditional Will and to the "probate process". A Revocable Trust is a trust created by a written document signed by a "Grantor" (also called a "Settlor") during his/her lifetime which names a "Trustee" and one or several "Beneficiaries". Typically, the Grantor names him/herself and a spouse as the Co-Trustees and sometimes names an adult child or close family member as an Alternate Trustee. In all instances, the Grantor and his/her spouse are the primary Beneficiaries during their joint lifetimes.
Revocable Trusts are merely so many pieces of paper until they are funded through the transfer of property from the Grantor to the Trustees for the benefit of the Beneficiaries. Thus, the defining features of a Revocable Trust include a writing signed by the Grantor during his/her lifetime, which:
- names and identifies the Grantor (also known as the "Settlor");
- names and identifies the Trustee(s);
- names and identifies the Beneficiaries;
- can be revoked, amended, modified or even terminated by the Grantor at any time during his/her lifetime;
- is funded by the transfer of the items of the Grantor’s property to the Trustee(s), that property being called the "corpus" of the Revocable Trust;
- provides that the Trustees, not the Grantor, have authority to manage the corpus of the Revocable Trust; and
- provides that the corpus is held, managed and administered for the benefit of the Beneficiaries
- The amendment or revocation will take effect as of the date of the execution of the writing revoking or amending the Revocable Trust.
- If the Settlor is not the sole Trustee, written notice of the amendment or revocation must be given to at least one Trustee other than the Grantor.
Funding the Revocable Trust.
A Revocable Trust governs the investment, management and disposition of property that has been transferred to the trust. To be valid, a trust must have a corpus. "Corpus" of a trust is the property transferred to the trust. Transfer is not accomplished by attaching a list of property to the trust document; by mere recital of assignment of the property to the Trust; or by holding of a receipt for the property by the Trustee. It is best practice to retitle and re-register property subject to title or registration into the name of the Trustees; and, with other property to prepare and sign an assignment of the property which describes the property with particularity. Title to property placed in the trust can be taken as "John Trustee of the Betty Beneficiary Revocable Trust". In the case of a transfer of real property, it is best practice to prepare and record a "Memorandum of Trust" along with the Deed. This Memorandum of Trust identifies the acting Trustees and successor Trustees, states that the trust is revocable and recites the powers of the Trustee. The Memorandum of Trust is recorded to provide needed information to those dealing with the property in the future and to avoid title issues with the property held by the trust. Often times, banks and brokerage houses will require a Memorandum of Trust to provide proof that the Trustee has the requisite powers to deal with trust property.
Living Trusts can allow the Grantor to Avoid Probate.
The best known advantage of Revocable Trusts is that a properly drafted and fully funded Revocable Trust will allow the Grantor to avoid Probate. Perceived disadvantages of Probate include:
- Time – The Probate process takes a minimum of seven months to complete and can often take more time. It is not unheard of for an Estate to remain open for several years. The Trustee of a Revocable Trust is free to distribute the trust property to beneficiaries as soon as administratively feasible after the death of the Grantor. However; there is nothing in law that will stop an unpaid creditors of the Grantor "follow the money" and seek a remedy against the beneficiaries. For this reason, the Trustee of a Revocable Trust distributes property to beneficiaries at his own peril and that of the beneficiaries if adequate provision is not made for all the creditors prior to distribution.
- Expense – It is generally perceived that the Probate Process is expensive, involving Court fees and fees paid to attorneys and accountants to navigate the process. In addition, the Executor is entitled to a commission that is, for example, equal to $34,000 on a $1,000,000 Estate( e.g., 5% on the first $100,000 in value, 4% on the next $200,000 in value and 3%of the value up to $1,000,000 in value). Finally, there is the cost of attorneys and accountants to navigate through the process and to prepare the necessary Court documents, including a Final Account. The fees to attorneys and accountants can equal or exceed the amount paid the Executor for his/her commissions.
In family situations; however, the Executor typically waives his/her commission because the Executor is most likely a major beneficiary of the Estate. In New York, there is no "minimum" attorneys fees and it is now a matter of negotiation between the Executor and the attorney to determine the amount of the fees. The Executor can insist that the attorney be paid on an hourly basis, thereby saving costs on a relatively uncomplicated Estate. In the author’s experience the amount paid for the Probate process has most to do with the complexity of the Estate and the willingness of the beneficiaries to "get along" and less to do with the Probate process itself.
- Court Supervision – Once a party submits to the Probate process, the Estate is under the supervision of the Court and its rules. The Executor must follow the rules of the Court, pay fees and submit reports as required by statute, regardless of the wishes of the beneficiaries or the complexity of the Estate. Property contained in a Revocable Trust are not subject to the jurisdiction of the Surrogate’s Court and can be administered as the Grantor provided in the Trust Agreement with the degree of formality (or lack thereof) as the Beneficiaries agree.
Use of a Living Trusts Will not avoid the Estate Tax.
One myth that persists is that the use of a Revocable Trust avoids Estate Tax because the Estate Tax is a "cost of Probate". The use of a Revocable Trust has no affect upon Estate Tax. If the value of the decedent’s "gross taxable estate" is in excess of $1,000,000 his/her Estate will pay a New York Estate Tax whether the property passes through Probate or through a Revocable Trust. In 2009 a Federal Estate Tax is owed on Estates in excess of $3,500,000 in value.
Costs to Challenge a Revocable Trust.
In the Probate, the Court process is initiated and maintained by the Executor at the expense of the Decedent’s Estate. The beneficiaries are part of that Court process and the bar to challenge the Will is relatively low and the costs to do so are likewise low. Thus, a disgruntled party may be more inclined to challenge the Will and its dispositive provisions. On the other hand, a Revocable Trust is administered after the death of the Grantor without the need of any Court involvement. Thus, the onus is on the disgruntled party to commence a Court proceeding with its concomitant expenses of Court and attorney fees. This added cost and effort may act as a bar to any interested party to challenge the Revocable Trust and its dispositive provisions.
The Court records of Probate in New York are public records and any person can go to the Clerk of the Surrogate’s Court (the name of the Court that handles Probate matters) to learn the approximate value of the property of the decedent passing through Probate, the name and address of his/her heirs and names and addresses of his nearest blood relatives. In addition, the decedent’s Will is available for review by any person with the time and inclination to do so. The content of the Revocable Trust, the amount and nature of property used to fund the trust and the names and addresses of the beneficiaries are a private matter, not open to public inspection.
Because administration of a Revocable Trust is a private matter conducted with little or no Court supervision, there is ample opportunity for "Trustee abuse". The Trustee can mismanage the corpus of the trust, divert money or property to the Trustee’s own use or ignore the express provisions of the Trust Agreement. For example, the trust may provide a gift to a beneficiary who unaware of the Grantor’s intent and who is disfavored by the Trustee. The express intent of the Grantor may be thwarted by the Trustee’s refusal to make the gift and no one may be the wiser for the Trustee’s inaction. The beneficiaries do have a right to require the Trustee to account for the Trustee’s actions (or inactions), but the cost and burden is placed upon the beneficiary, not the Trustee, and an accounting may be too late to provide an adequate remedy. It is for these reasons that the selection of successor Trustees is so important and why some Grantor’s require the Trustee to periodically account to the beneficiaries despite the added formality and expense.
Continuity of Asset Management.
If the Revocable Trust is properly drafted and funded, then administration of the trust property is seamless from the life to after the disability or death of the Grantor. While a Power of Attorney can accomplish the same result, it is not without its drawbacks. For example, while a Bank is required to honor a Power of Attorney, brokerage houses are not under the same constraint. Further, there is oftentimes reluctance on the part of these institutions (i.e., brokerage houses) to honor a Power of Attorney even if it is drafted and signed in strict compliance with the Law. If, on the other hand, title to the property of a disabled person is held as part of the corpus of a Revocable Trust, the Trustee has the absolute right to deal with the property in any fashion he/she deems appropriate and in the best interest of the Grantor. Thus financial institutions are much more likely to take direction from the Trustee of a Revocable Trust, regardless the health of the Grantor.
Living Trusts are not a Medicaid Planning Device.
The Grantor of a Revocable Trust will be ineligible for Medicaid and other needs based governmental benefits if his/her resources exceed a certain level. One myth that persists is that property transferred to a Revocable Trust will not be counted for purposes of eligibility for such government benefits. This myth is simply not true! Because the Grantor of a Revocable Trust has access to the income and principal of the trust, the entire corpus of the Revocable Trust is a "countable resource". While there are some trusts which are effective as a Medicaid planning devise, it is not true that Revocable Trusts are included among their number.
Living Trusts allow the Grantor to Plan for Incapacity.
Any interview between an elderly client and his/her attorney concerning Estate Planning should involve a discussion of the mechanics, advantages and disadvantages of a Revocable Trust. Any number of factors can result in the disability of an elderly person, and a Revocable Trust is uniquely situated to allow for seamless management of an elderly persons property in the event of disability. As noted above, the property in the Revocable Trust is owned by the trust, not the Grantor, and the Trustee is entitled to manage that property regardless the physical or mental health of the Grantor. Banks, brokerage houses and other financial institutions are knowledgeable about the workings of a Revocable Trust and generally do not make inquiry beyond the Trustees authority to act on behalf of the trust. Further, since the Revocable Trust is, most likely, established and funded months, even years, before the onset of a disability, there is a routine and familiarity with the dealings of the trust which will allow a continuity of management even in the event of disability.
To properly provide for the disability of the Grantor, a Co-Trustee or successor Trustee is named in the trust document. Often times this Co-Trustee or successor Trustee is a child or younger family member whom the Grantor trusts has the Grantor’s best interests at heart. Planning for disability speaks to the wisdom of providing the banks, brokerage houses and other financial institutions a "Certificate of Trust" at the time the property is transferred or the account is titled in the name of the Revocable Trust. The bank, brokerage house or other financial institution has a writing signed before the onset of the disability by the Grantor identifying the Co-Trustee or successor Trustee who will act in the event of the Grantor’s disability.
Use of a Living Trusts may Avoid a Will Contests.
Persons adversely affected by the Decedent’s Will have the right to challenge the Will in a proceeding in Surrogate’s Court. Persons adversely affected by a Will can include a person named in a prior Will who would receive less if the current Will were admitted to Probate. Further, certain blood relatives who would be beneficiaries of the Decedent but for the current Will may also challenge the Will. If the elderly person finds him/her self in a situation where he/she wishes to leave all or a portion of the Estate to a person not closely related by blood and he/she suspects that the surviving blood relatives will "make trouble" , then the elderly person is well advised to consider a Revocable Trust. Revocable Trusts are established during the Grantor’s lifetime and do not go through the Probate process. Thus, a Revocable Trust cannot be challenged simply by filing an objection in Surrogate’s Court. Instead, the disgruntled party must commence an action, at his own expense, to challenge the Revocable Trust. While the proof needed to defeat a Revocable Trust may be similar to that required to challenge a Will in the Surrogate’s Court, the effort and expense involved may act as a bar to such actions by disgruntled parties.
Use of a Living Trust where Grantor’s Relatives are Difficult to Locate.
Notice of the Surrogate’s Court proceeding to admit a Will to Probate must be given to blood relatives who would be a beneficiary of the decedent but for the provisions of the current Will. In many situations, where the Decedent has survived spouse, children, brothers and sisters, the location of blood relatives (e.g., nieces, nephews, cousins) may be difficult to find if the family is not close knit. There is a cost in dollars and time to search out these blood relatives that must be borne before the Will can be admitted to Probate and the Estate administered. Because a Revocable Trust is a substitute for the Probate process, a search for the adversely affected relatives is not required, thereby saving the accompanying delay and cost to the administration of the Grantor’s Estate.
Use of a Living Trust to Avoid Ancillary Estate Administration in another State.
It is not unusual for a Decedent to own real property in another State or Country. For example, many people maintain a vacation home in Canada, the Carolinas or in Arizona. If a Decedent dies owning property in another jurisdiction, the Executor must maintain a Probate proceeding in the State where the property is located in order to insure a clean chain of title. This proceeding, called Ancillary Estate Administration, adds a level of complexity and cost to the administration of the Decedent’s Estate that may be avoided by use of a Revocable Trust. If during the Grantor’s lifetime he/she transfers title to the out of state property to a Revocable Trust, then at the death the property is owned by the trust, not the Decedent. Since the Revocable Trust is a legal construct, not a natural person, it can never die and it survives the death of the Beneficiaries. Thus, the Trustees are able to deal with the real property, even sell it, after the death of the Grantor without the intervention of the Courts.
Administration of the Revocable Trust during the Grantor’s Lifetime
Revocable Trusts are established by the Grantor to manage his/her property during life, in the event of disability and upon death of the Grantor. The duty to manage the property in the trust (called the "corpus") falls upon the Trustees, who may or may not be the Grantors. The Trustee is constrained by the terms of the Trust Agreement and must always follow the instructions found in that document. The duty of care and prudence owed by the Trustee is to the Beneficiaries who always include in their number the Grantor(s).
The Beneficiaries (who generally include the Grantor and members of his family) are those who receive the benefits of the trust. The identity of Beneficiaries and the extent to which they benefit is governed by the Trust Agreement. It is not uncommon for the Grantor to name a class of Beneficiaries and to provide discretion to the Trustee to benefit only one, some or all of the members of the class. Other times, the Trust Agreement will provide that the Trustee will make distributions as directed by the Grantor and the distributions are made at the direction and in the discretion of the Grantor. However; there is not one "right" formula prescribed to administer the Revocable Trust. It should be notes that while the Grantor may direct the timing and amount of the distributions, it is the job of the Trustee to actually administer the trust corpus and to make the distributions to the Beneficiaries.
Distributions upon the Death of the Grantor.
It is important to note that a Revocable Trust becomes irrevocable upon the death of the Grantor because the power to revoke the trust terminates at the date of the Grantor’s death. This means that the provisions of the Trust Agreement cannot be changed once the Grantor is dead. This places a special significance on fully providing for the death of the Grantor in the Trust Agreement and planning for the administration and distribution of the corpus after the Grantor’s death.
The actual management of property in a Revocable Trust is unaffected by the death of the Grantor, because the property is owned by the Trustees of the Revocable Trust, not the Grantor. Thus, at the Grantor’s death the Trustees will continue to hold and manage the property and to make distributions according to the Trust Agreement. Obviously, since the Grantor is dead he is no longer the primary beneficiary of the trust. Instead, the beneficiaries become those persons named in the Trust Agreement whom the Grantor intends to benefit according to his Estate Plan. The Grantor can gift the property in the trust outright to the intended beneficiaries and cause the Revocable Trust to terminate. On the other hand, some or all of the corpus of the trust may remain in trust for the benefit of named beneficiaries. The Grantor may name the Revocable Trust to be the vehicle to manage the corpus or he may name another trust altogether.
The Grantor may still need a "Pour-over" Will.
Properly drafted and fully funded, a Revocable Trust will allow the Grantor’s Estate to pass to beneficiaries without the bother or expense of the Probate Process. Many times; however, the Grantor will not or can not transfer all of his property to the Revocable Trust. Some assets may be overlooked and others may be difficult to transfer to the Revocable Trust. For example, it may be impractical or impossible for the Grantor to make the special provisions in the Revocable Trust which are required to allows it to hold shares of an S-Corporation. Consequently, the Grantor must prepare a Will which disposes of the S-Corporation shares.
Best practice dictates that in all instances the Grantor of a Revocable Trust prepare a Will to insure that all of his property passes to the intended beneficiaries in an orderly fashion. Since much thought and effort has gone into drafting the Revocable Trust to make it the vehicle of an orderly passing of the Grantor’s Estate, the Will is a secondary document and is drafted to closely reflect the existence of the Revocable Trust. Generally, the Will provides that all the Grantor’s property outside the corpus of the Revocable Trust will be transferred to the Revocable Trust and will be managed and distributed according to the terms of the Revocable Trust. Such a Will is called a "pour-over" Will because the property outside the corpus of the Revocable Trust "pours-over" to the Revocable Trust. Other provisions often times seen in a "pour-over" Will include authority of the Executor to look to the corpus of the Revocable Trust as a source of money to pay any Estate Tax owed, any claims against the Probate Estate and costs of administration the Estate. "Pour-over" Wills are simple in structure and do not reflect a concern for Tax or Estate planning. Instead, the planning done by the Grantor is reflected in the provisions of the Revocable Trust.