Revocable Living Trusts
A revocable living trust allows someone to control property for the benefit of someone else. Also called an inter-vivos trust, a person creates a living trust while they are alive. A settlor initially creates the trust. The person controlling the property calls himself the trustee. The beneficiaries receive the assets of the trust. A trustee not only manages the assets that fund the trust, called the principal, but also any income the trust receives.
Oftentimes, the person creating the living trust serves as the initial trustee. The trust may also name the trustee as a beneficiary. This allows the person creating the trust to still enjoy the property during life. This provides the settlor the opportunity to have access to it if needed. The settlor names additional alternate or co-trustees to act after death. He may name a family member or friend to serve as successor trustee. In other situations, he may name a third party such as a bank or professional to serve.
The person creating the trust and acting as trustee can grant authority to revoke the trust. Living trusts that can be canceled or amended are considered revocable. In addition to the trust itself, a revocable trust allows settlors to reclaim what they contribute to the trust.
Considering a Living Trust
In weighing creating a living trust, an individual should examine whether a trust accomplishes what they seek to create. Trusts act as important tools in establishing one’s legacy. The benefits of this may come with additional costs. Individuals evaluating their estate planning objectives should discuss the need for a trust with a legal professional.
When control is paramount
A living trust not only provides the settlor with the ability to control assets during life but also after death. A settlor can construct rules for who can obtain trust funds. Moreover, he can place rules for using the funds. Additionally, a trust can put restrictions involving amounts withdrawn. A trust may include additional investment requirements and instructions. Essentially, a trust allows the settlor to dictate how property is enjoyed after death.
A revocable living trust can reduce some of the expenses associated with an estate. When someone opens a probate estate, the cost depends on the total size of the estate. This includes not only the court-suggested fees but also the time spent in order to transfer assets. Changing legal title ahead of time means the estate will not pay for it later.
When there are no beneficiaries left on life insurance proceeds or retirement accounts, the assets will revert to the estate. Because of this, naming a trust ahead of yourself as a beneficiary can save money when it comes to probate expenses.
Desire for privacy
Trusts created during the life of someone benefit families by providing privacy. The public can access probate records such as inventories and accounting filings. When someone places assets in a revocable living trust, they avoid asset disclosure in probate. Likewise, you do not submit the trust document along with the named beneficiaries with the court. On the other hand, executors must submit wills probate. Therefore, the gift amounts in a will are public knowledge.
This river’s edge in trust privacy is government reimbursement and allegations involving breaches of duty. Gifts made from a trust are still subject to federal estate tax disclosures. Likewise, trust income is still reportable income. Meanwhile, a trust becomes a public record when introduced in court as evidence. Because of this, one must not look at a trust as an absolute privacy shield. However, it does add protection above standard will distributions.
Probate court takes time. Unfortunately, this means delays occur before family members receive access to gifts. A funded revocable living trust creates access to family members if needed. This provides help with the expenses that come up when someone dies. Likewise, a trust can also be used in order to cover post-death expenses as well as day-to-day living for beneficiaries. These funds can help before other assets such as death benefits become available.
In order to avoid delays with probate, a trust must be funded before death. If it is simply funded with probate proceeds, the probate must occur before distribution. If this occurs, families may lose this important benefit of trusts.
Preventing ancillary probate
Estates must open probate proceedings in every state where the deceased owns real estate. An ancillary probate proceeding places property out of the name of an out-of-state estate. This often extends the time needed to administer an estate. If a person places out of state property into the name of a trust before death, his estate avoids ancillary probate. In taking this action, individuals must closely examine the mortgages and any other requirements that can complicate this process.
Protect from non-settlor creditors
A revocable living trust does not protect trust assets against creditors of the person creating the trust. However, it can limit distributions to beneficiaries with creditor problems. This helps ensure that trust assets go to family members and not anyone else. In order for this to occur, the trust must instruct the trustee to avoid making such a distribution. Likewise, the trust must not give beneficiaries the ability to access trust assets on demand.
No Need to Wait Until Death
If no other planning is made, a guardianship acts as the only way to utilize the assets of an incapacitated person. Even then, the guardian must act in the best interests of a ward. Before courts grant guardianships, the guardian must post a bond. This can create financial hardship for loved ones. A revocable living trust naming successor trustees at incapacity can help ease this burden. Oftentimes, a co-trustee may continue to act on behalf of the trust. In the event the settlor becomes incapacitated, the trust assets can be used not just for the settlor, but also for other beneficiaries. This means parties must not wait until death in order to use the trust assets.
In order for a trust to be effective, a trustee must perform his duties properly. Above all else, trustees must act in the best interests of the trust and the beneficiaries. In doing so, Ohio law assigns trustees the duties of fiduciaries. In the event a trustee fails to follow this duty, other parties have standing to seek remedies in court.
Trustees must follow the rules and requirements imposed in the trust agreement. This means if a trust requires a distribution, the trustee must make a distribution. Likewise, a trustee cannot simply violate the terms of the trust without consequences. If a trustee fails to act on his duty, the beneficiaries may seek the removal of the trustee.
A trustee must treat all the beneficiaries in a trust equally and act in good faith. This means he cannot make unequal distributions if two people are treated similarly. Moreover, a trustee cannot ignore requests for funds considered valid under the trust agreement. Trustees must examine their actions carefully to ensure they are not consciously or subconsciously favoring one beneficiary over another.
Funds held in trust cannot be co-mingled with other funds. This means that if a settlor provides a $10 bill to the trustee, the trustee cannot deposit it into the trustee’s personal checking account. In addition to co-mingling, a trustee should avoid self-dealing when possible. Self-dealing means acting the opposite of a fiduciary. Instead of placing the interests of the beneficiary first, one who self-deals takes his own interest above all others.
A trustee must act as a reasonably prudent person when it comes to managing the trust assets. This means the trustee should invest trust assets in ways that will produce a return but minimize risk. Likewise, the trustee should protect the property when possible with insurance and other safeguards. If a trustee makes thoughtful and well-informed decisions, he should not encounter problems.
Acting as a reasonable and prudent person also includes defending the trust assets from outsiders when possible. If a party attempts to prosecute trust assets, a trustee should take reasonable steps to defend them including hiring defense lawyers.
Provisions in Trusts
The flexibility of trusts creates substantial value to families looking to preserve their legacy. This is because trusts not only provide control during life but also after death. Revocable living trusts can include distribution tables, schedules, and requirements to ensure that trust proceeds are spent in the manner desired by the settlor.
You can avoid beneficiary creditors by creating a spendthrift provision in a trust. A spendthrift provision protects the income and principal of a trust from beneficiaries of creditors. This precludes attempts from garnishing the trust access. While it will not protect distributions made to a beneficiary, it will protect the rest of the trust for other beneficiaries and family members.
When creating trusts, settlors should consider how they want the trust to make distributions. While with revocable living trusts, the settlor likely wants to maintain control for himself, he will want to consider future distributions to other loved ones. The creator of the trust can decide how, when, and why trust beneficiaries receive trust assets. This can be specific dollar figures, age thresholds, percentages, or leftovers from other distributions. When it comes to constructing trust distribution levels, the trust can be creative.
When a trust includes real estate, the trust creators should consider how to deal with the property. In some instances, the creator may want the trust to hold on to the property even after death so family members can enjoy it. One example of this is a vacation home. In doing so, the assets and income of the trust can go towards maintaining the property. This can include, but is not limited to property taxes, mortgages, or routine maintenance and beautification.
Appointing New Trustees
Sometimes, trusts need new trustees. This can occur because of death, incapacity, or other life events. Because of this, a trust should consider these situations when the lawyers first draft the trust. Otherwise, delays may occur requiring court action to appoint a new trustee. A successor trustee provision should clearly outline the requirements, situations, and options for naming a new trustee.
While trusts can extend beyond the life of the creator, a trust cannot exist indefinitely. A trust creator may decide it makes sense to clearly state the end date or situation for a trust. For example, the trust may wrap up following a certain calendar date or life event. It may last until beneficiaries reach a certain age and are then trusted with complete ownership of the trust assets.
Restrictions on Revocable Living Trusts
A revocable living trust creates many advantages for families. However, these trusts cannot solve all problems when it comes to estate planning. Families with more complex estate planning needs may require other mechanisms instead of or along with a revocable living trust.
One reason families create living trusts stes from the desire of probate avoidance. With this avoidance comes expenses incurred during the life of the trust creator. Specifically, instead of spending thousands in probate fees, a one-time fee may be necessary in order to draft the trust. In addition to this, deed preparation and other minor costs that ensure funding of the trust occur during the life of the settlor.
If the settlor’s goal in creating a trust comes from Medicaid eligibility, a revocable living trust will not work. In a revocable trust, the settlor maintains the ability to retain the trust assets. This means Medicaid will include these assets not only when it comes to eligibility, but also estate recovery. If the settlor is considering long-term care when it comes to Medicaid, discussing the ramifications with an elder law attorney is highly recommended.
Much like Medicaid, a revocable living trust, by itself, lacks power when it comes to protecting assets from creditors. Creditors have the ability to access trust assets if the settlor owns the funds. Similarly, funds distributed by a trust can be accessed by beneficiary creditors. When considering a trust and an asset protection strategy, the settlor should analyze what avenues exist when it comes to minimizing risk.
Need for Proactivity
An unfunded trust is not worth the paper it is printed on. When considering a trust, the creator should determine whether or not he wants to take the steps needed to fund the trust while alive. Without doing so, a revocable living trust leaves the settlor as susceptible to the costs and delays of probate as a testamentary trust.