Vantage Point Legal Services LLC

Revocable Trusts

WHAT IS A REVOCABLE TRUST?

A trust is a special type of agreement that determines how a person’s property is to be administered, managed and distributed during his or her lifetime, and also upon death, or for some period of time after death, but in a way that completely avoids probate.

A trust is classified as a “living” trust when it is established during the grantor’s lifetime, and as a “revocable” trust when the grantor has reserved the right to amend or revoke the trust during his or her lifetime.

A revocable trust normally involves three parties:

The Grantor - This is the person who creates the trust, and usually the only person who provides funding for the trust. More than one person can be the grantors of a trust, such as when a husband and wife join together to create a single family trust.

The Trustee - This is the person who holds title to the trust property and manages it according to the terms of the trust. The grantor often serves as trustee during his or her lifetime, and another person or a corporate trust company is named to serve as successor trustee after the grantor’s death or in the event the grantor is unable to continue serving for any reason.

The Beneficiary - This is the person or persons who will receive the benefits of the income and principal from the trust. This can be the grantor (and the grantor’s spouse) during his or her lifetime, and the grantor’s children (or anyone else the grantor chooses to name) after the grantor’s death, such as grandchildren and/or charities.

HOW IS A REVOCABLE TRUST CREATED?

There are two basic steps in creating a revocable trust. First, an attorney prepares a legal document called a “trust agreement” or a “declaration of trust” or an “indenture of trust” which is signed by the grantor and the trustee. Secondly, the grantor transfers property to the trustee to be held in accordance with the specific terms of the trust instrument for the benefit of the beneficiary named in the trust document.

CAN A REVOCABLE TRUST BE CHANGED OR REVOKED?

Yes. The grantor ordinarily reserves the right in the trust document to amend or revoke the trust at any time during his or her lifetime. This enables the grantor to revise the trust (or even terminate the trust) to take into account any change of circumstances such as marriage, divorce, death, disability or even a “change of mind.” It also affords the grantor the peace of mind that he can “undo” what he has done. Therefore, the grantor may proceed with the confidence that he can easily make certain types of changes to his estate plan as his goals and objectives change from time to time. Upon the death of the grantor, however, most revocable trusts become irrevocable and no changes are allowed thereafter.

IS A REVOCABLE TRUST AN ADEQUATE SUBSTITUTE FOR A WILL?

No! Even though a revocable trust may be considered the key document in an estate plan, a will should always accompany a revocable trust. This type of will, referred to as a “pour over” will, names the revocable trust as the primary beneficiary. Thus, any property which the grantor failed to transfer to the trust during his or her lifetime is added to (or “poured over” into) the trust upon the grantor’s death and distributed to (or held for the benefit of) the beneficiary in accordance with the terms of the revocable trust.

There cannot be an absolute assurance that all property will be transferred to a revocable trust during the grantor’s lifetime. For instance, the probate estate of a person who dies as a result of an auto accident may be entitled to certain insurance settlement proceeds. These settlement proceeds can only be transferred from the estate to the trust pursuant to the terms of a will. Without a will, the proceeds would be distributed to the heirs under the Missouri statute dealing with intestate succession, instead of to your trust beneficiaries as you designate them and in the manner you set forth in the trust.

It is also important to remember that a parent cannot appoint a Guardian for minor children in a revocable trust. This can be accomplished only in the will.

DOES A REVOCABLE TRUST AVOID PROBATE EXPENSES?

Yes. Property held in a revocable trust at the time of the grantor’s death is not subject to probate administration. Thus, the value of trust property is not considered when computing the statutory fee for the personal representative or the estate attorney. Also, the amount of any required bond for the personal representative will be reduced to the extent the property is held in the trust and not subject to probate administration.

Nevertheless, certain expenses associated with the death of a person are not eliminated. Deeds to real estate transferring the property from the trust to the beneficiaries must be prepared. Estate tax returns must be filed when the total value of the property owned at death (including assets in a revocable trust) exceeds approximately $5,000,000 in value for those dying in 2011-2017.

The decedent’s final income tax returns must still be filed and income tax returns for the trust must also be filed. A trust cannot avoid necessary attorneys fees in the administration and distribution of assets from a trust.

WHAT ARE THE ADVANTAGES OF A REVOCABLE TRUST?

There are a number of important Advantages in creating a Revocable Trust that should be considered:

1. Reduction Or Avoidance Of Probate. Of course, one of your estate planning goals is to take all reasonable steps to reduce or avoid probate altogether. This goal can be achieved in large measure through the careful and coordinated utilization of revocable trusts with other estate planning techniques.

Any assets held in your revocable trust at your death would pass to your beneficiaries under the terms of the trust without being subject to probate administration. The use of a revocable trust avoids many of the administrative expenses, fees of court-appointed representatives, publicity, delays and restrictions on the investment and management of your assets that result if your estate is subject to probate administration. For instance, if you currently own real estate located in another state, the use of a revocable trust as the formal legal owner of it can reduce the time and expense of transferring that real estate to your beneficiaries by completely avoiding an out-of-state probate court proceeding.

The well-planned use of a revocable trust works much better in achieving the goal of reducing or avoiding probate than simply using a will in combination with jointly-held property. This is because the probate-avoidance feature of jointly-held property is not available as a practical matter on the death of the surviving spouse who has not remarried.

2. Continuity Of Investment And Management Decisions. A revocable trust serves as a convenient vehicle for the continued investment and management of your assets in the event you become legally incapacitated and therefore unable to handle your own financial affairs in the future. Legal title to any assets placed in a revocable trust is formally held by you in your fiduciary capacity as the trustee, and no longer by you in your individual capacity. In the event you become disabled or incapacitated, or for any other reason cannot manage your own affairs, your successor trustee or trustees, whom you specifically name in the trust, automatically take over your duties and responsibilities for the investment and management of the assets of the revocable trust. It is important to select carefully your successor trustees because of the power and responsibility they would have.

A revocable trust is beneficial not only in situations where, because of sickness or injury, you are no longer physically able to attend to your financial affairs, but also in the event you become legally “incapacitated” or “incompetent” as defined under state law for any other reason, such as in cases of mental incapacity (i.e., Alzheimer’s disease, coma). Without a revocable trust in such cases, a legal “conservator” would be appointed by the local probate court — without any input from you — in order to manage your property. The expenses, delays and restrictions of a court-supervised conservatorship over your estate are avoided if your assets are held and managed by the successor trustees of a revocable trust. Please notice that, if your legal incapacity or disability ceases and you are restored to better health, you can retain the right to resume your position as sole trustee if you so desire.

A revocable trust also provides for continuity of investment and management of your assets by successor trustees upon your death and thereafter. This is very important, especially if your beneficiaries are not formally trained to invest and manage such assets themselves.

3. Flexibility Of Investment And Management Decisions. A court-supervised Personal Representative of a probate estate under a will has much less flexibility regarding the investment and administration of your assets than does a trustee of a well-drafted revocable trust. The probate court will require the investment of your assets in only the most conservative and restrictive of investments, whereas a successor trustee has greater freedom of choice regarding investments in order to attempt to obtain a higher rate of return on investment of the assets in your trust.

Of course, your successor trustees would be required to account to your beneficiaries regarding the administration of the trust, and can be required to account to a court if it is alleged or if it appears that they are not properly carrying out their duties under the terms of the trust. Your beneficiaries are no less protected against malfeasance or mismanagement by successor trustees of a trust than they are by Personal Representatives of a probate estate. A revocable trust can require the successor trustees to obtain a bond to insure their proper management of the trust.

4. Protection Of Your Privacy. In the event of your legal disability or death without a revocable trust, your court-appointed guardian, conservator or personal representative is required to report publicly the details of the administration of your probate estate to the supervising probate court. Additionally, your will is required by law to be filed with the probate court and become a public record following your death. All of the private details regarding the amount of your wealth, the size of your estate, the identity of your beneficiaries, the distribution of assets among your beneficiaries, and the administration of your property under your will become matters of public record. Since a revocable trust does not get filed with any court, and since the administration of a revocable trust does not get reported to any supervising authority, the use of a revocable trust preserves your privacy and avoids unnecessary publicity.

5. Retention Of Control. As grantor, you can retain 100% control over all of your assets, especially if you also serve as the sole trustee of your revocable trust during your lifetime. You can retain the right to direct the investment and management of your trust assets. The existence of a revocable trust as a part of your estate plan, and the transfer of all or some of your assets into the revocable trust during your lifetime, will have minimal effect upon the way you currently live your life and manage your financial affairs.

6. Better Achievement Of Estate Planning Goals. Finally, a revocable trust can be drafted so as to achieve all of your estate planning goals with respect to the distribution of your assets following your death, in most cases even better than under a will. Any type of dispositive plan, whether or not influenced by the desire to save federal estate taxes, can be provided for, created and implemented under a revocable trust in many ways better than under a simple will.

WHAT ARE THE DISADVANTAGES OF A REVOCABLE TRUST?

While the Advantages of a revocable trust receive most of the public attention, and are generally considered to far outweigh the Disadvantages, nevertheless the Disadvantages should also be considered.

Since a revocable trust is a more complex legal document, it is often more costly to establish. Also, deeds and other transfer documents must be prepared transferring the grantor’s assets to the trust, a process which can require a substantial investment of the grantor’s time. The advantages described above are available only if you actually transfer assets into the revocable trust during your life. This may involve some time and effort on your part and perhaps some expense in reregistering securities and re-titling real estate or other assets. Such costs should be minimal, especially when considered in comparison with the potential savings of probate costs and federal estate taxes, but you need to be aware of the cost and possible inconvenience of initially transferring all or part of your assets to the trust.

The use of a revocable trust requires more ongoing monitoring to ensure that assets remain in the trust and that newly purchased assets are titled in the trust. For instance, a grantor who transfers funds to a different financial institution (perhaps to obtain a better interest rate) must remember to advise the new institution to title the new account in the name of the trust.

After the grantor’s death, some of the income tax rules applicable to a trust are not as liberal as those available to a probate estate. For example, a probate estate may elect to use a fiscal year as its tax year, while a trust is restricted to the calendar year. Trusts must pay estimated income tax payments while a probate estate is exempt from this requirement for the first two years. Trusts are also subject to other tax rules that do not apply to probate estates.

IS A DURABLE POWER OF ATTORNEY OR A LIVING WILL STILL NEEDED?

A grantor of a revocable trust should also consider having a durable power of attorney for financial affairs in order to accomplish certain objectives that cannot be attained solely by a trust and to complement what is accomplished by a trust. Please see the more detailed discussion of durable powers of attorney below.

A “living will” has an entirely different function than a last will and testament or revocable trust, and they should not be confused. Whether a person has a trust ordinarily has no bearing on the decision to have (or not to have) a living will. Please see the more detailed discussion of living wills below.

OTHER CONSIDERATIONS IN THE USE OF A REVOCABLE TRUST

Certain legal issues regarding the use of a revocable trust have not been answered under Missouri law. For instance, it is not clear whether an individual can disinherit his or her spouse by transferring all assets into a revocable trust. Also, while a divorce automatically disqualifies a divorced spouse under a will that was signed prior to the divorce, the same may not be true with a trust.

A revocable trust may not be appropriate for certain assets. If stock is owned in a subchapter S corporation, the trust must comply with certain technical income tax requirements to avoid terminating the subchapter S status. Also, if the trust is named as the primary beneficiary of a qualified pension or retirement plan, or an IRA account, or a 401 (k) plan, a surviving spouse may be precluded from completing a “spousal rollover” and deferring the income tax until later.

DOES THE REVOCABLE TRUST REDUCE INCOME TAXES OR ESTATE TAXES?

During the grantor’s lifetime, the typical revocable trust has no effect on the income tax which the grantor will owe. In fact, if the grantor is the trustee or a co-trustee, all income earned on assets held in the trust is reported directly on the grantor’s income tax return and the trust is not required to file a return. After the grantor’s death, the trust is taxed at the same rate as a probate estate. However, as mentioned above, a probate estate may enjoy certain relatively minor income tax advantages.

Regarding the estate tax, proper planning can often reduce the amount of estate tax payable upon a married grantor’s death. At one level your revocable trust serves to avoid probate completely for any assets held in the trust. At another level it also serves to reduce or completely avoid federal estate taxes by more fully utilizing your Unified Credit against federal estate taxes.

As you may know, each person dying in 2006, 2007 or 2008 was allowed to give away the first $2 Million of their assets (through combined lifetime gifts and bequests at death) free of federal estate taxes. We call these first dollars that get distributed tax-free upon death the “Unified Credit Exemption Amount.”  This Exemption Amount increased to $3.5 Million for people dying in 2009, and then to $5 Million for people dying in 2010, 2011 and 2012.  The American Taxpayer Relief Act of 2012 permanently extended this $5 Million Exemption Amount for people dying in 2013 and into the indefinite future. However, the Exemption Amount is adjusted annually for inflation, and the adjusted Exemption Amount for people dying in 2017 is currently set at in excess of $5,000,000. Congress will reset this adjustment for each year in the future.

Upon your death, the revocable trust may create a special Unified Credit shelter trust in order to receive and segregate the first dollars that qualify for the Unified Credit in order to better provide for fuller utilization of the Unified Credit in the federal estates of both you and your spouse.

WHO CAN SERVE AS THE TRUSTEE?

A grantor who desires to manage his or her own financial affairs and who is physically and mentally able can (and ordinarily should) serve as trustee. But provisions should be made in the trust for a successor trustee or a series of successor trustees to take charge in the event the grantor becomes unable to continue for any reason or in the event of the grantor’s death. Or, the grantor may simply desire to be relieved of asset management responsibilities, whether temporarily or permanently.

WHO CAN SERVE AS THE SUCCESSOR TRUSTEE?

The successor trustee can be a trusted relative, friend, lawyer, accountant or other trusted individual. Or it can be a professional trustee such as a trust company or a trust department of a bank. Missouri law does not require an individual serving as successor trustee to be a Missouri resident. However, certain restrictions apply to banks or trust companies whose principal place of business is located outside the state of Missouri. Since the activities of the successor trustee are not ordinarily supervised by a court or other independent third party, the selection of the successor trustee should be carefully considered.

The grantor is not limited to naming only one trustee. Two or more individuals may be named to serve alone and in succession as sole successor trustee, or together as co-trustees. Or a combination of individuals and a corporate trustee may be named as successor co-trustees.

If an individual is named to serve as successor trustee, the grantor should consider whether the trustee is to be compensated for his services, and whether the trustee is to be bonded for the faithful performance of his duties as trustee. The grantor’s decisions on these matters should be clearly stated in the trust document. If a bond is required, the bond premium is properly paid by the trustee from the assets in the trust.

WHO CAN BEST ADVISE YOU ABOUT A REVOCABLE TRUST?

You should never sign a revocable trust without the advice of an attorney who practices in this area of law. He or she will be able to advise if a revocable trust is right for you.