Frequently Asked Questions
Revocable Living Trust
A POWERFUL COMPLEX DOCUMENT
© 2022
Jim Schuster, Certified Elder Law Attorney
Member of the National Academy of Elder Law Attorneys
Southfield Michigan
(248) 356.3500 / www.JimSchuster.com
This article is a brief overview of trusts. The reader who wants to include a trust in their lifecare and estate planning will need to read more in-depth and consult with an experienced Elder Law or Probate and Trust attorney. Note, asset protection trusts are not the subject here.
A trust is a legal document and arrangement designating a trustee to receive and hold legal title to property and administer the assets in accordance with the instructions in the trust document. The person who creates the trust is known as the “settlor,” “grantor”or “trustor.” The persons who receive income or other distributions from the trust are called “beneficiaries.” In this Q&A when we refer to a “trust” we refer to a revocable living trust.
A living trust (also called an “inter vivos trust”) is created during your lifetime. A trust that is created after you die is a “testamentary” trust.
A revocable trust is one that is capable of being changed, amended, or terminated. This is almost the only trust that the average person will ever see. “Revocable” means the settlor retains control over the trust. A trust that may not be changed is called “irrevocable.” Such trusts are frequently used in tax planning.
Most people should review what they are really trying to accomplish with their assets and consider what is possible. The cost, although important, is secondary to the goal. The key is that by using the trust we can have our instructions followed. We cannot do this with joint property – the joint tenant is free to do as s/he wishes. If we put instructions or conditions on a gift in a Will, we have created a testamentary trust. With the trust we can give guidance even when we cannot speak and that may be during incapacity or after death.
The goal of this section is to describe those situations when a trust can make a difference. These break down into matters during the lifetime of the person creating the trust (settlor/grantor/trustor/trust maker/ etc.) and upon death of the person. Note further that on death there are three non-trust conditions when the person has property solely in his or her name: 1) probate and no Will; 2) probate with a Will that does not define who gets the property; 3) probate of a Will with a testamentary trust created through the Will. These situations will not be covered here.
There are a number of situations where a trust is the best alternative. Some of them are:
• Persons with a business such as a landlord with many rental homes. The trust, along with other business planning, will allow for smooth transition of administration in case of disability or death.
• Single persons who have no spouse or children to take care of them should they become incapacitated. The trust can help the person during lifetime to maintain independence and have their instructions followed. The trust will also direct their gifts after death.
• A married person whose spouse has a degenerative disease such as Alzheimer’s who is concerned about who will take care of the sick spouse should the “healthy” one predecease. In this case there may be no children or the healthy spouse may judge that the children need guidance and assistance in the care of their parent.
• A person who wants to leave property with conditions or “strings attached.” For example a grandmother may want to leave $10,000 to a child for college education, but if the child does not go to college, then to the child at age 25. A parent may have a child with a drug or gambling problem. In that case the trustee will administer the money. Unless a Will has such trust conditions in it may not place conditions on gifts and if it does then the probate court must create a testamentary trust.
• Persons with real estate in more than one state who want to avoid multiple state probate.
• A parent of an adult disabled child who wants to provide for the child after the parent dies. The trust may be made so that the child does not lose public benefits.
• Persons who want to avoid probate both during lifetime (guardian and conservator) and do not want to use joint property and beneficiary designations to distribute their property on death.
• Tax motivated persons whose tax avoidance plan requires the use of a trust. Examples of tax driven trusts include “A-B trusts,” Irrevocable Life Insurance Trusts, and QPRTs, and many more to avoid paying estate taxes on the transfer of property at death of the settlor. Note that tax driven trusts must often be irrevocable to achieve tax saving. See your tax attorney or call us for a referral (248) 356-3500.
Let’s return to a point mentioned above. One of the great advantages of a trust is that it can provide for comprehensive disability planning. If the settlor becomes incapacitated, the trust provides for a successor trustee to take over administration of the trust. That trustee follows the instructions in the trust, which must specifically provide instructions for the successor trustee to be ultimately protective. For example if a nursing home stay is a possibility, the settlor may instruct the trustee to consult with a professional care manager to ensure that all alternatives are considered first. The settlor may set personal standards of care over and above what the law would require. The trust instructions may require the hiring of independent professionals to monitor the quality of care, to provide for regular visitation and for a patient advocacy. The trust avoids the necessity of having the probate court name a guardian and conservator to manage the assets and make personal decisions.
Not only can it be changed, it should be reviewed periodically to ensure it accords with your needs. For example it should reviewed on a to account for changes in your situation or that of others who are part of your overall plans(deaths, divorces, etc.). Similar to a Will, the terms of a living trust may be amended as long as you have the capacity to do so.
Most often the settlor is the trustee with full power over trust assets. The settlor transfers assets to the trust and the trust is considered the owner. The trust document is given to account holders to make the transfer. Upon incapacity or death the trust provides for a successor trustee. Upon death the trust contains instructions for the distribution of assets, just as a Will would. The primary difference between a trust and a Will is that assets held in trust do not have to go through probate. Like the familiar joint bank account they do not need to go through probate since the trust, operating under state trust law, provides who the new owners will be. The assets are then distributed according to the instructions in the trust.
Yes a trust must be part of a comprehensive plan, lest your plans conflict with laws or other documents. Here’s a simple example. A trust must be “funded.” So if a person has trust and a joint bank account with another, the joint bank account will be controlled by the trust. On death it will go to the “joint owner” and not to the trust.
So, what else is needed? A Will, called a “pour over” Will, is also drafted in conjunction with the trust. If all assets are not transferred into the trust, this Will picks up those assets at the time of death and through probate transfers them into the trust for administration and distribution. A general durable power of attorney is needed for legal matters that cannot be handled by the trust such as assets not transferred to the trust or items than cannot be transferred such as pension benefits or rights under health insurance policies. A living will or more broadly and properly, a healthcare power of attorney is needed to handle substitute medical decision making during lifetime and at death.
No. As long as the settlor is the trustee any income generated by assets owned in the trust are taxed as if they were still held in the settlor’s name. Taxes are still reported on the IRS 1040 form. No special taxpayer treatment is needed.
In a word, no. During the owner’s lifetime the revocable living trust has no effect on the owner’s income tax. The owner will continue to be taxed on the income from the assets held in the trust. Similarly property taxes will not increase for property placed into a trust of the Settlor. After the owner’s death the assets in the trust will be subjected to the estate tax, if at all, in the same manner as a probate estate. However, a different kind of trust may be used as part of a tax avoidance plan and as such reduces taxes. That type of trust effects limitations on control of the trust assets in ways the typical trust does not. Often times, proper estate planning will involve the use of both types of trusts.
Yes, initially. The cost for a competently drafted trust usually runs somewhere between will vary but most often will cost over $2,000. More complex disability or death planning, or complex asset portfolios result in more time and costs to complete the trust. Even the simplest trust is more complex than a Will since it does much more than a Will. The only purpose of the Will is to distribute assets at death. The trust has its own administrative structure for lifetime and post-death administration. The Will uses the probate court administrative structure. The trust, typically, addresses incapacity, the Will can only address death.
Not per se. But there are considerations that everyone should be aware of. There is expense in establishing and funding a competently drafted trust. The expense may reflect the complexity of the goals of the settlor. The expense will be limited if the settlor has clear, well thought out goals and is willing to do much of the “leg work” in the funding of the trust. Also, keeping the trust current in both assets held, applicable law and trustee instruction, is an ongoing process and the failure to keep current can cause more problems than not having a trust in the first place. In addition, conditions may change that makes planning for naught. Finally, a poorly drafted trust can cause great expense of time and money down the road when the terms cause require court involvement. And finally we should add that problems can arise with wills as well. Consult an attorney for in-depth information.
This answer is not an easy one. Many people have been scared to death by the stories of very expensive and slow probate. An average cost may be somewhere between 1% and 5% of your estate if you hire a lawyer. It can be less if a family member handles the process without fee, but it still could be a long, involved process. If the assets are very simple, say a house and bank account, probate may cost less than a thousand dollars and take your personal representative six months to a year to finish probate. If there are many assets, accounts, property to sell etc., it could take much longer. He or she may distribute assets when creditors are paid and there are no conflicts or tax problems.
In most cases, yes. In the case of probate on death, this answer does not consider the loss of investment return on the money used to create the trust. That depends on the cost and how long before death the trust was created. For example, how much would $2,000 be worth if it were invested for 25 years? Where there are trusts contests in probate court there may be very little difference in time or expense.
In the instance of avoiding conservatorship or “living probate” the trust is almost invariably faster and cheaper.
No. Many people think that putting their assets into a trust would help them qualify for Medicaid, because the assets would no longer be titled in their name. The trust is revocable and under the settlor’s complete control. Nothing is “given away”. The trust can cause problems since Medicaid considers a home in a trust to be a “countable” asset that must be sold or transferred out of the trust to the applicant or spouse. It is no longer an “exempt asset.” That could require the trust to be “reformed” in court. See below.
Yes. A poorly drafted trust may cause problems. Consider a trust that becomes irrevocable upon a settlor’s incapacity. Assets may not be removed. If the family wants to sell the home that is in the trust, they will have to go to probate court to get the trust “reformed.” Consider a couple that has a joint trust and a spouse must go in the nursing home. Medicaid will consider any asset in the trust available to pay the nursing home regardless of the needs of the community spouse. The trust will either need to be amended or else reformed in court.
Hope the foregoing helped. If it caused more questions for you, that can be a good thing since you want to be sure there are No unforeseen problems with your plans. So, got questions? Call us for a referral at (248) 356-3500.