Revocable living trust.
Two additional documents are typically executed together with the RLT: (2)
* The durable power of attorney authorizes the power-holder to act for the grantor when the grantor is disabled. (3)
* The pour-over will functions as a "fail safe" device to transfer at death any remaining assets into the RLT, to undergo minimal probate as a means of clearing the estate of creditor claims, and to appoint guardians of any minor children. (4)
DURING LIFETIME. The grantor establishes the RLT and typically names himself as the sole trustee. This is accompanied by a retitling and transfer of property to the trust. (5) Because the grantor maintains full control over trust assets there are no income, gift, or estate tax consequences. (6)
UPON DISABILITY. If the grantor becomes disabled due to legal incompetency or physical incapacity, a designated successor trustee steps in to manage the grantor's financial affairs. (7) Disability is determined under trust provisions providing a standard of incapacity (e.g., certification by two physicians that the grantor is unable to manage his financial affairs). Also, during the grantor's disability, the holder of the durable power of attorney is authorized to transfer additional grantor-owned assets to the trust.
UPON DEATH. The RLT becomes irrevocable when the grantor dies. Under the grantor's pour-over will, any probate assets not previously placed in the RLT during lifetime are transferred to the RLT as part of the grantor's residuary estate. Assets held in trust are then disposed of according to the terms of the trust. This can include an outright distribution to the trust beneficiaries, or the trust may contain provisions establishing separate tax-savings subtrusts similar to the marital and family trusts under the exemption trust will. (8)
Although the RLT is not a panacea, it clearly offers substantial benefits for many individuals. The utility of a funded revocable trust increases with the grantor's age, when there is an increased likelihood of incompetency or incapacity and the need for asset management. (9)
INFORMATION REQUIRED FOR ANALYSIS & PROPOSAL
Attorney Drafting Trust Instrument Must Know
1. Name of trust grantor.
2. Name of trust grantor's spouse.
3. Name of individual who will be successor trustee.
4. Name of institution that will be alternate successor trustee.
5. Name of beneficiaries other than grantor.
6. Ages of minor beneficiaries.
7. Approximate size of grantor's gross estate (i.e., will estate be subject to federal estate taxes or state death taxes).
8. To who, in what amounts, and when trust income is to be paid.
9. To who, in what amounts, and when trust corpus is to be paid.
Attorney Drafting Pour-Over Will Must Know
1. Name of testator.
2. Name of testator's spouse.
3. Name of individual who will be personal representative or executor.
4. Name of individual or institution who will be successor personal representative or alternate executor.
Attorney Drafting Durable Power Of Attorney Must Know
1. Name of grantor.
2. Name of individual to be given the power.
3. Type of power to be given (e.g., general durable power of attorney or special durable power of attorney).
CROSS REFERENCES TO TAX FACTS ON INSURANCE & EMPLOYEE BENEFITS (2010)
Q 310. When income of funded life insurance trust is taxed to grantor.
Q 311. When income is taxable to trust or to trust beneficiaries.
Q 843. Computation of federal income tax for trusts and estates.
Q 844. Description of the grantor trust and how it is taxed.
Q 852. Items that are included in a decedent's gross estate.
Q 902. Types of gifts that are subject to taxation.
(1) There is disagreement among commentators regarding the contestability of the RLT. Clearly, wills are subject to being challenged (see pages 343 and 350). Likewise, a trust can be attacked under contract law based on fraud, forgery, lack of mental capacity, and duress. However, it seems reasonable that once a RLT has been in existence and administered by the grantor for a number of years, it would be less vulnerable to a successful attack than a will that comes into being upon the testator's death. It has also been suggested that the perceived privacy or confidentiality advantage is largely illusory, since most individuals are not all that concerned that their probate records will be available for public scrutiny. It has also been observed that it is wise to evaluate the actual costs being avoided, since establishing and maintaining a RLT involves both time and expense; and in most states and locations attorneys' fees and probate costs are quite reasonable (most estates never actually pay executor fees, since the typical will provides for a waiver of fees and commissions if a family member is appointed to act as executor). It is true that with both RLTs and wills: assets must be collected and distributed, bills must be paid, and tax returns must be filed. In the final analysis, the undoubted benefit of having professionals who enthusiastically advocate the use of RLTs is that it motivates their clients to do planning that is sorely needed. The merits of the RLT should be carefully evaluated in light of individual circumstances and needs.
(2) Other documents that should be considered as part of a comprehensive estate plan include: (1) revocable assignments transferring property to the RLT that is not subject to precise titling (e.g., jewelry); (2) the appointment of a health care representative to act for the grantor in health care matters (e.g., to sign insurance forms); and (3) a living will stating that in case of a terminal illness or condition the grantor does not wish to be subject to life-prolonging procedures that serve only to prolong the dying process (see page 464).
(3) The durable power of attorney is discussed on page 411.
(4) The RLT cannot be used to designate the guardian of a minor child. This must be done under a will that is subject to court approval. See Pour-Over Will chart on page 39.
(5) Although there is a fair amount of paper work involved in transferring title to existing property, or putting new acquisitions in the name of a trust, it is likely that the grantor is better prepared to accomplish this task while alive and competent, than a conservator in case of disability or an executor in case of death. When done by the grantor, it facilitates management or transfer of assets upon the grantor's incompetency or death (and likely saves both time and money). Even a partial transfer of assets to a RLT can reduce the size of an estate to the point where it qualifies for a summary probate and unsupervised administration. Before real property is transferred, it should be ascertained that the transfer would not cause acceleration of a note or mortgage, reassessment of the property for tax purposes, or loss of a real estate homestead exemption.
(6) Because the trust is revocable the assets are not removed from the grantor's estate, and since the grantor is considered the owner of the trust corpus there are no income tax advantages (i.e., as a "grantor trust" all trust income is taxed to the grantor, see page 436). A transfer of property from the trust to someone other than the grantor would be subject to gift taxes (see chart, page 55). As long as the grantor is the trustee there is no requirement that a separate income tax return be filed. However, once a successor trustee takes over during disability a separate informational return must be filed. After title is transferred, the grantor would receive account statements reading: "John Q. Jones, as Trustee of the John Q. Jones Revocable Trust dated January 7, 2003."
(7) In those states (such as Florida) requiring executors or personal representatives to be state residents, the RLT can be used to facilitate the use of an out-of-state trustee.
(8) In and of itself, the RLT is not a tax-saving device. But the trust can offer estate tax benefits if it contains provisions similar to the Exemption Trust Will (see chart, page 29).
(9) With a young entrepreneur who is actively investing, buying and selling property, as a matter of convenience, property is often not transferred to the RLT. In these situations, the necessary transfers are made using the power of attorney and pour-over will.