What is a trust?
A trust is the legal relationship that is created when a person transfers property to a trustee with the understanding that the trustee will manage the property for the benefit of one or more beneficiaries.
The term “property” is used here in its broadest sense to include both real property – such as land and buildings – and personal property – such as bank accounts, stocks and bonds, and personal effects.
The person who transfers the property to the trustee is called a trustmaker. This person is also known as a settlor, grantor, or trustor.
Usually, the trustmaker is also the trustee (or perhaps co-trustee) and the initial beneficiary of the trust.
For the reasons explained below, a married couple typically creates two revocable living trusts instead of just one. Commonly, both husband and wife are co-trustees of both of their trusts during their joint lifetimes, and then, after the death of one spouse, the survivor serves either as sole trustee or co-trustee with one or more other individuals or a trust company.
What is a revocable trust?
A trust is controlled by a document called the trust instrument. If the trust instrument allows the trustmaker to revoke the trust or change the trust instrument, the trust is what we call a revocable trust.
If the trust instrument does not allow the trustmaker to change the trust instrument or revoke the trust, it is called an irrevocable trust. Irrevocable trusts are also used in many estate plans. They allow trustmakers to make gifts but keep the recipients from having complete control over the gifted assets.
What is the relationship of a revocable trust to a living trust and a testamentary trust?
A living trust is one that you create during your lifetime by making a trust agreement with a trustee and transferring assets into the trustee’s name. Thus, a revocable living trust is one that you create and fund during your lifetime, and over which you have virtually complete control.
A testamentary trust is one that goes into effect and is funded (i.e., assets are transferred to the trustee) after your death.
Will I lose control of my assets when they are transferred to the trustee?
No. The trust instrument binds the trustee. The trustmaker has the final say over what the trust instrument says, and failure to abide by the trust instrument can make the trustee personally liable to the beneficiaries, including the trustmaker. Therefore, if the trustee is shown not to have abided by the trust instrument, that person may have to pay damages.
Most often, the trustmaker is the initial trustee. Thus, the trustmaker need not worry about anyone questioning his or her management of the trust for two reasons:
- The trustee is usually granted broad discretion to favor the trustmaker as the initial beneficiary.
- The trustmaker of a revocable trust has the power to amend the trust instrument or to revoke the trust and to get the trust assets transferred back into the trustmaker’s name.
No one else is in a good position to challenge the trustmaker/trustee. In fact, potential beneficiaries have a vested interest in not doing anything that might cause the trustmaker to revoke the trust or change the trust instrument in order to exclude a troublemaker, for example. This is a simple demonstration of the “golden rule” of estate planning: The one who hath the gold maketh the rules.
What is probate?
Probate is the court proceeding to transfer a dead person’s assets to others. Simple in concept, but not always so in practice. Probate can easily take a year or more to complete, and the attorneys’ fees and other costs associated with probate could reduce a decedent’s gross estate up to 5% or more.
In addition to the money and time that probate can consume, another reason to avoid probate is that the court’s probate files are public records. Individuals may examine probate files to find profitable or other useful information for themselves – and detrimental to decedents’ families. This is a growing concern, especially with regard to identity theft.
If a decedent owns assets located in more than one state or country, a probate may be necessary in each jurisdiction. If one considers probate bad, more than one is worse.
How does a revocable living trust avoid probate?
Once assets are transferred to the trustee, the trustmaker no longer holds legal title to them – even if the trustmaker and the trustee are the same person. Thus, if the trustmaker dies, the trust continues, and the successor trustee (who is named in the trust instrument) takes over administering the trust.
Since a trust can’t die the same way a person can, the trust assets are not subject to probate upon the trustmaker’s death. Title to the trust assets simply remains in the trust, and the trust instrument tells the successor trustee exactly what to do with them. Any assets not transferred to the trustee, however, will be subject to probate upon the trustmaker’s death.
What other benefits do revocable living trusts provide?
A revocable living trust can avoid a conservatorship proceeding (sometimes called a “living probate”) in the event the trustmaker loses the ability to handle assets.
Ordinarily, if a person becomes incompetent, a court appoints 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 entire conservatorship process can be costly and time consuming.
Moreover, the documents that are filed in court are public records and may contain information that you would rather not be made available to people with prying eyes and questionable motives.
If your assets had been held in trust and you became incompetent, the successor trustee could step in – without court action – and administer the trust where you left off.
Scott Makuakane, JD, CFP
Est8Planning Counsel LLLC
Honolulu, HI 96813