A living trust is simply a trust that is created during your lifetime as opposed to a testamentary trust that is created after your death. And trusts, living or testamentary, can be as different as the various models of automobiles available to your parents today. Whether your elderly parents should set up a living trust depends entirely on what they are trying to accomplish because different kinds of trusts can achieve different results.
Think of the decision like this – your parents can walk, ride a bus, take a train, or perhaps even fly to their destination but they can also drive themselves. If they decide they want to drive themselves then which automobile best suits them? Will they need a van to haul a lot of people? Do they want to travel in luxury such as a Lexus would provide? Do they want reliable and cheap transportation like a Toyota Prius, or will they be carrying tools and supplies to work with them and need a pickup truck?
Just like automobiles, trusts come in many different models. A trust is simply an agreement between a trust creator and a trustee (i.e. trust manager) where the trust creator transfers assets to a trustee to hold and manage under the terms dictated in the trust agreement for the benefit of someone identified by the trust creator. Trusts have gained a lot of popularity in recent decades among the middle class who recognize that trusts can solve many everyday routine challenges even if we don’t have millions or billions of dollars to manage.
Revocable Living Trust
Revocable living trusts, typically, are established by a trust creator who may also serve as the trustee to manage the assets for themselves during their lifetime. They are revocable and changeable by the creator at any time during the creator’s lifetime.
In order to understand the advantage of this type of trust it is necessary to think about the three stages of life that most of us will progress through. First, we are fully capable and competent to mange everything our self and the management of assets in a living trust are not really much different from owning the assets outright and managing them ourselves.
The first important advantage of a revocable living trust arises when we become unable to handle our affairs. Traditionally, management of our assets in this situation either required a conservator or an agent under a power of attorney, neither of which is ideal. A conservatorship requires probate court intervention that means we turn over control to a probate judge who may never have even met us and almost certainly will not have any intimate knowledge of us or our families. Because of the loss of control and costs of conservatorship proceedings, many middle class families appoint an agent under a power of attorney instead. This is also not an optimum solution, however, for a couple of reasons:
- Financial institutions are reluctant to accept a powers of attorney and many states’ laws do not require them to accept a power of attorney so they many times don’t; and
- A power of attorney is nothing but a super blank check, it typically says whatever I can do with my stuff my agent may do also. The grant of authority does not contain any limitations, conditions, restrictions, or instructions because these provisions would insure that gun-shy financial institutions would not accept the agent for fear that they could be implicated if the agent violated any restriction or limitation.
A revocable living trust, however, is the owner of the financial account and when the trustee becomes incapacitated a successor trustee simply assumes the management responsibilities for the trust just as a new president of a corporation would when the old president retires. Banks are comfortable with this transition in management responsibilities because trusts have existed for hundreds of years and the body of law surrounding them is extensive so their perceived liability is much less than following the directions of an agent.
When we eventually depart this earth, a revocable living trust becomes irrevocable (i.e. unchangeable) and serves as a will substitute by outlining the same wishes that we would put into a will. But, a trust, unlike a will, does not have to be probated. Many people consider this an advantage and, indeed, in states such as California the probate system is so expensive and time consuming that it should be avoided but in many states probate is not very onerous. Even in these states, however, having a revocable living trust serve as a substitute will is desirable when:
- Minor heirs exist. In probate each minor must have a separate guardian ad litem (i.e. attorney other than the one who represents the estate) appointed to protect their interests whether they are receiving any inheritance or not. As you can imagine, with multiple attorneys working, costs can mushroom; or
- You anticipate trouble from disgruntled heirs. A probate court is a convenient forum for a disgruntled heir to cause problems. They do not have to hire an attorney or file suit in order to have their claims heard because the estate is already in court. Additionally, it is much easier to claim that you were unduly influenced or incompetent when you made your will because it may have been executed years ago and placed on a shelf to gather dust. The creator of a living trust who also serves as trustee, however, has many witnesses who can testify to capacity and influence issues because they interacted with the trustee during their lifetime.
Irrevocable Living Trust
An irrevocable living trust can also be used advantageously but many people forego their advantages because (1) they don’t really understand how trusts operate and (2) irrevocable sounds an awful lot like cast in concrete (i.e. non-changeable) and they are afraid they will be trapped if their wishes or laws change.
Traditionally, irrevocable living trusts have been used to minimize estate taxes and had to, therefore, conform to very strict IRS rules that if not cast in concrete at least created a bog of quicksand that would be hard to slosh through to change course. But here is the good news today, an individual must have more than $5.34 million net worth and a couple $10.68 million net worth before estate taxes are relevant so most of us do not have to concern ourselves with the overly burdensome IRS rules. We can, therefore, have an irrevocable trust that is changeable and flexible.
So if we can have a flexible and amendable irrevocable trust how can we use it for middle class folks? The uses are only limited by our imaginations and some of the more popular uses include:
- Protecting our assets from nursing homes while retaining the income from and access to the assets;
- Qualifying for a non-taxable Veterans Administration pension of up to $25,020, indexed for inflation and guaranteed by the full faith and credit of the United State government; and
- Protecting assets from divorce, lawsuits, and other predators.
So, should your parents consider a living trust? Yes, if they are concerned about any of the following:
- Management of their resources during incapacity;
- Disgruntled or minor heirs;
- Privacy;
- Protecting what they have spent a lifetime scrimping and saving to accumulate form a nursing home;
- Qualifying for as much as $25,000/year tax-free pension; or
- Protecting what they have spent a lifetime scrimping and saving to accumulate form other creditors and predators.
Attorney Stephen J. Bailey
Birmingham, Alabama
