Answer: A revocable living trust can avoid a conservatorship proceeding (sometimes called a “living probate”) in the event the trustmaker (that’s you, if it is your trust) loses the ability to handle assets. Ordinarily, if a person becomes incompetent, a court must appoint a conservator to administer the person’s assets on his or her behalf. The conservator must then account to the court every year or so, and the whole conservatorship process can end up being extremely costly and time consuming. Not only that, but the documents in the court’s file are a matter of public record. Anybody who so chooses could go down to the courthouse and find out personal information about you (such as the specific diagnosis of your incapacity). Even worse, that person can find out information about your assets and your family members that would best be kept private. On the other hand, if your assets had been held in trust, upon your incapacity the successor trustee could have stepped in—without court action—and picked up the administration of the trust where you left off.
Trusts also allow you to have control over your estate even after your death. If one of the beneficiaries of your trust after your death is a minor, you will want your trust to hold on to that beneficiary’s share of your estate until the beneficiary reaches the age when you believe he or she will be mature enough to handle it. Think back to when you turned 18. What would you have done if all of a sudden you had more money than you knew what to do with? Would your little munchkins do any differently? If you don’t plan for that possibility, you could be setting up one of your loved ones to blow his or her inheritance. If this does not appeal to you, your trust document could provide, for example, that the share of any beneficiary under the age of 25 will stay in trust until the beneficiary turns 25. In the meantime, the trustee could make distributions to or for the beneficiary, but the beneficiary could not demand that any distributions be made until he or she turns 25.
Many clients choose to leave children’s inheritances in trust during the children’s entire lifetimes to provide them with creditor protection and to avoid estate taxation upon the children’s deaths. The trust assets can fully available to the children, if you give them the power to pick the trustees of their individual inheritance trusts, and you can allow your children to say where their remaining trust assets go when they die. Thus, they get virtually all of the control of outright ownership, while at the same time being spared two important disadvantages of outright ownership: vulnerability to creditors and susceptibility to predators. If the trusts are set up and administered correctly, most creditors (including ex-spouses) and questionable characters can be prevented from walking away with your children’s inheritance. If that wasn’t good enough, consider this: the trust assets will not, at your children’s deaths, be counted as part of their estates and subjected to estate tax. Even the IRS goes away disappointed. The technical term for this kind of trust is a “generation-skipping trust.” Children are understandably suspicious of the name, but they are not actually skipped—unless you want them to be.
There are many other objectives your revocable living trust can help you meet. You are limited only by your own creativity and that of the professionals who help you design your trust.
Scott A. Makuakane, Esq., CFP
Est8Planning Counsel LLLC
Honolulu, Hawaii 96813