Elder Law Matters

The Revocable Living Trust

By: Joseph T. Buxton, III, CELA

If you read much of the hype surrounding revocable living trusts or have attended attorney seminars and workshops promoting Revocable Living Trusts (RLT), you would think that if anyone wrote a RLT, all of their estate planning needs would be satisfied.

This is only partly true. The RLT does not take the place, for example, of the need for a durable power of attorney, a living will, advanced medical directive or the need to carefully complete beneficiary designation forms for IRA’s, 401K’s, 403B’s and other qualified retirement plans. Nor does an RLT replace the need to designate proper beneficiaries on your life insurance. Yet the RLT is perhaps one of the best single estate planning tools available to you in completing a viable, comprehensive and cost efficient family estate plan.

Unlike a Will, which is a creature of statute requiring statutory formalities, a trust is a contract between the Grantor (maker or donor, i.e., the person(s) setting up the trust), and the Trustee (i.e., the person(s) managing the trust). The contract will specify the duties and responsibilities of the Trustee (the manager) to properly manage assets titled in the name of the Trustee for the benefit of the Grantor, beneficiary, or for the benefit of other designated beneficiaries of the Trust.

Trusts are either revocable (changeable) or are irrevocable, and cannot be changed once they have been established. Trusts can be either living (or inter-vivos) trusts or testamentary trusts. Living Trusts are created during the lifetime of the Grantor to carry out some specific task or responsibility during the Grantor’s lifetime and thereafter. A Revocable Trust can be revoked, modified, or amended by the Grantor at anytime provided the Grantor is not incapacitated.

A revocable living trust is by far the most popular, as well as most flexible, of Trusts. Today you will find it used as the backbone of most comprehensive estate and wealth management plans. One of the primary reasons that individuals use a RLT is to provide for the lifetime management of assets for the benefit of the Grantor. In the case of a joint trust for the benefit of both husband and wife during their lifetime, the Grantor or Grantors’ double as both the maker and the manager (trustee) of the trust. After the Grantors have created the trust, they will re-title all of their assets, other than retirement plans and other annuities, to the name of the Trustee or Trustees. The Trustee(s) will manage the assets for the benefit of the Grantor(s). Each Grantor is a beneficiary of the Living Trust. Should a Grantor become disabled or incapacitated, their co-Trustee, (their spouse, an adult child, other individuals or entity) will take over as back-up Trustee and manage the assets for the Grantor as long as the Grantor lives.

In addition, once you have re-titled your assets (real estate, your investment accounts, your bank accounts, your business interest) in the name of the Trustee, the RLT becomes a very effective disability planning tool, eliminating, for all practical purposes, the need to have a court appointed conservator named to manage a disabled individuals assets during their incapacity. The backup Trustee does it for them.

An additional benefit associated with the RLT is it’s use as a substitute for a will. Assets held in your name as Trustee will be in your trust in the event of your death. Therefore, there will be no need to have the court appoint an “executor” or as we now call them, a “personal representative”, to handle the management and distributions of your assets after death. Your trustee will do this job. The Trust eliminates, for all practical purposes, the need to go through the court supervised management and distribution of your assets through probate. Accordingly, there will be no probate tax on your probate estate, since you will have no probate estate. Secondly, there will be no need to subject the distribution of your assets to supervision by the court appointed commissioner of accounts or other officials. This effectively eliminates the need to pay court costs, commissioner fees and recording costs associated with probate.

In addition to these obvious benefits associated with the use of RLTs, the trust can also be designed to minimize or eliminate estate taxes, particularly for a married couple. For example, a Joint Revocable Trust, where a husband and wife join together to create a single trust and re-title their assets in their names as joint trustees, each own one half of the trust assets. At the death of the first spouse, their share of the trust is set aside in a separate “tax sheltered” Family Trust for the benefit of the survivor. Generally the survivor is the Trustee of the Family Trust. The Family Trust takes advantage of the decedent’s federal estate tax exemption (currently $2 million). If the decedent’s share exceeds the exemption, the excess or balance can be paid over to the survivor’s remaining trust through the unlimited marital deduction. Thus, regardless of which party dies first, their share of the trust can utilize their death tax exemptions, and later the survivor, at death, can apply their own death tax exemption to their share of the trust. Utilizing two single trusts instead of a joint trust, a couple can also preserve their individual estate tax and estate death tax exemptions by splitting their assets between the two trusts.

The Federal Estate Tax is scheduled to expire in the year 2010, yet the permanent removal of the Federal Death Tax is problematical. For under the current law, the repeal is effective for only the year 2010. Unless Congress acts to make the repeal permanent, the individual Federal death tax exclusion will revert in 2011 to the 2001 law with a $1 Million Dollar exemption per tax payer (plus a factor for inflation). Therefore, I recommend to my clients that they include in their Revocable Trusts, or their wills, if they do not use a trust, provisions to take advantage of their Federal Estate Tax exclusion at the time of their death. Assets that would otherwise be exempt will not pass to their surviving spouse and be counted as part of the surviving spouse’s estate at the time of the spouse’s death. Failure to do this is simply stacking one spouses assets on top of the other spouses estate and subjecting the children or other heirs to the possibility of unnecessary estate or death taxes at both the state and federal level.

Aside from taxes, the RLT protects assets from the risk of long term care expenses. A feature that can be incorporated into a RLT is a special needs provision for disabled or incapacitated spouse or beneficiaries. It is important to understand, that if you die without a will, or if you have a will or a trust and you leave assets to a spouse or even a child or other beneficiary who has a disability and who may be entitled to public benefits such as Medicaid, your gift or inheritance, will, in all likelihood, disqualify the individual from any future benefits until those assets are spent. If, however, you incorporate in your trust a provision that says that any assets to be distributed to a disabled or incapacitated individual be held in trust for the benefit of that individual and will not be used in any way that would disqualify the beneficiary from their benefits, you protect that individual. This is known as a Special Needs Trust. Since the assets in the trust are your assets, you can put any restriction on the distribution of those assets that you want and if properly handled, these assets will not disqualify an individual from benefits because these are your assets, and not the beneficiaries’ assets. If you hold them in trust for the benefit of the beneficiary the State cannot reach them as belonging to the beneficiary. This trust feature will not work for a surviving spouse under current Medicaid rules. Therefore, we create a special needs trust under the decedent spouse’s will and put provisions in the RLT to make this work.

Finally, a RLT is useful to hold out-of- state real estate and a special advance by a trust. If you die owning real estate out of state, the transfer of title for that real estate may involve having to go through the probate process in THAT State. If the title to the property is held in the name of the Trustee, then your trustee can deal directly with that real estate without any further legal issues, or procedures, to follow. In other words, if you were to die owning land in Maryland, Virginia and in Florida, and each of these properties had been deeded to you as Trustee, your successor Trustee can manage and dispose of those properties without the necessity of going through probate in any state.

While a RLT is not a substitute for good estate planning, nor is it the only tool you should use in setting up your estate plan, it is, however, the most powerful and useful weapon to protect yourself against the cost and inconvenience of guardianship, conservatorship, unnecessary costs and delays associated with the administration of an estate through probate. It also eliminates public disclosure of the nature and distribution of your estate and assets, avoids court supervised accountings and inventories and eliminates unnecessary legal fees associated with administration of an unplanned estate. A trust will also avoid your out-of-state executors of a will from having to post a bond with surety with the circuit court here in Virginia annually until the estate is closed.

If you would like more information on RLT’s, you may write me at chipbuxton@virginiaelderlawyers.com for a copy of our latest brochure, THE REVOCABLE TRUST.

Or you may want to review the benefits of using a RLT Estate Planning Learning Center on our web page www.trustbuilders.net