Keith W. Michon, P.C. - Revocable Trusts

1105 Massachusetts Avenue, Suite 1F
Cambridge, Massachusetts 02138
Phone: (617) 492-1122
Fax: (617) 492-0303

308 Harvard Road
Stow, Massachusetts 01775
Phone: (978) 430-9175
Fax: (978) 897-5345

Revocable Living Trust as an Estate Planning Tool

When you die, your original last will and testament is filed with the probate court. The executor is then appointed and the will subsequently probated through a formal court process. In contrast, the revocable living trust can begin to benefit you while you are still alive. Since the trust is "revocable", you can still make changes to address your unique situation.

The creator (or initial trustee) of the revocable living trust will not own any property in their name individually after the assets have been "funded" or transferred into the trust. The assets will instead be owned by the trustee for the benefit of the beneficiaries. As long as you are a competent adult, you can establish a revocable living trust. When the creator of the trust dies (and the trust is fully funded), the trust assets will not need to be probated, since the trust will continue to live on and the successor trustee named in the revocable living trust will immediately have the legal authority to act on behalf of the creator. This successor or "administrative trustee" will then be able to take over control of bank accounts, investment accounts, business interests, collect life insurance proceeds, retirement accounts and annuities while also paying final bills, debts and taxes. The successor trustee shall then distribute the balance of the trust funds to the beneficiaries who are named in the trust agreement. Essentially, the trust operates like a manual for how your assets are to be handled when you die. As the creator of the trust, you can name any competent adult as your trustee.

Some Advantages of the Living Trust

Avoidance of Probate – This represents a huge advantage over the alternative of facing the restrictive rules of probate court system. This is very important in the case where you own real estate in more than one state. Without a trust, your family will be faced with two or more probate proceedings. The trust will also allow your family almost immediate access to cash at a very difficult time.

Changeable or Revocable – The living trust allows you to make changes (or amendments) to the trust document while you are still alive.

Keeping Things Private – Trusts allow the transfer of your personal assets to remain private to the public, where as the probate process of a will is a public proceeding.

Minimizes Estate Tax – The revocable living trust can be created to include provisions that transfer wealth by establishing a credit shelter trust in the event of your death which helps reduce estate taxes for large estates that exceed the combined estate tax exclusion amounts.

Uninterrupted Management – With the help of a professional trustee, the trust assets can continue to grow for several generations.

Gets You Organized – When the revocable living trust is prepared and executed, you will be required to fund your assets into the trust. At the time of funding, you will be required to locate and organize all of your financial information such as account statements, original stock certificates, vehicle titles, boat titles, deeds to real estate and corporate minutes.

Eliminate Challenges to the Estate – A last will and testament can sometimes create family disputes that may have been festering while you were alive. Upon your death, your will can be challenged by any member of your family. To invalidate a will you must either prove it was signed under duress or that the maker was incompetent on the day it was signed. Assets are frozen and cannot be distributed until the dispute is resolved. In contrast, it is much more difficult to contest a revocable living trust. To invalidate a living trust you would have to prove it was invalid not only on the day it was signed but each and every day it was in existence thereafter. Assets placed in a living trust are not frozen pending the outcome of a legal challenge. Anyone wishing to contest the trust must file suit against each of the beneficiaries; in the meantime the assets in the trust can be distributed. In the trust document, you can expressly disinherit anyone who challenges the specific wishes contained in your trust upon your death.

Avoiding Guardianship or Conservatorship – While also avoiding probate, you can similarly avoid the imposition of the restrictive rules of guardianship or conservatorship which could, in many cases, remain in effect for several years. A well drafted Revocable Living Trust should contain provisions for determining your mental capabilities outside of a court proceeding as well as how to take care of you and your finances if you do become mentally incapacitated. This will save you and your family thousands of dollars by keeping you and your assets outside of a court-supervised guardianship or conservatorship.

Segregation of Assets – Under a revocable living trust, married couples with substantial separate property assets acquired prior to the marriage can segregate those assets from their community property assets.

Illness or Incapacitation – If an illness or accident leaves you incapacitated, your successor trustee can handle your financial affairs without the need for a court appointed guardian or conservator.

Trusts for Children – If the beneficiaries of your trust are minor children or others who might not use an inheritance as you intend, the trust can continue to hold the assets until they reach a more mature age.

Some Disadvantages of the Living Trust

You'll Still Need a Last Will and Testament – In the event the revocable living trust is only partially funded, then a will shall be required to direct the unfunded assets into the revocable living trust. The will must then be probated. This is why it is important to fund the revocable living trust at its inception.

Maintaining Proper Records in the Name of the Trust – All future assets will be required to be registered to the trust. In addition, professionals involved with the administration of the trust will need access to the trust documents to review and confirm trustee powers and duties.

Transfer of Property into the Trust – Once the trust is established, property must be transferred into the name of the trust. For real estate, document drafting charges (deed, etc.) and recording charges will be incurred.

Expense of Planning – In general, it will cost more time and money to set up and fund a Revocable Living Trust than it will be to simply write a last will and testament. While the cost associated with the preparation of a "standard" will is approximately a few hundred dollars, the cost associated with the preparation of a revocable living trust is in the range of $1,500-$2,000.00.

Minimal Asset Protection – A revocable living trust may offer very little asset protection if the creator retain an ownership interest such as naming yourself as trustee.

Administrative Expenses – Professional fees will be incurred (most often yearly) in the event a professional such as investment advisor is named as trustee. Trustee fees will also be incurred if you appoint a bank or trust company as the trustee.

A Few Definitions

Grantor –This is the person who sets up the trust. The grantor has many names such as the creator, settlor or trustor. The grantor will retain full control to manage or change the trust at any time.

Trustee – The trustee is the person who will manage the assets in the trust. Again, this will most likely be you while you are alive. When a trust is created, the trustee is usually the same individual as the grantor. For married couples, usually the husband and the wife both act as co–trustees. You do not have to be your own trustee if you do not want to or do not feel you are able to. You can name a child or friend or even an institution to manage your affairs for you while you are alive.

Successor Trustee – This is the person who will manage your assets for you when you die or if you should become incapacitated. This person or persons will have the right to manage your affairs without the need for any probate court. The successor trustee will immediately have the same powers that you as grantor/trustee had to buy, sell, borrow, or transfer the assets inside the trust. More importantly, the successor trustee has the right to distribute the trust assets according to your instructions in the trust. Fortunately for you and for the protection of your heirs, the successor trustee does not have the legal right to change your trust. The trust becomes irrevocable or unchangeable after the death of the grantor(s). However, the successor trustee does have the right to manage the assets in the estate, but must do so for the benefit of the beneficiaries.

Beneficiaries – The people who will receive the benefit of the trust assets are called the beneficiaries. Typically the estate will go to the surviving spouse. If there is no surviving spouse, assets will pass to the people you named in your trust. You are not limited to who you wish to name as a beneficiary of your estate. You can name your children, relatives, friends, or a charitable organization to be your beneficiary.

Conclusion

The establishment of a revocable living trust is a flexible and effective estate planning tool that is not right for everyone. In establishing your estate plan, you should outline your unique financial worth, objectives and personal values.