TRUSTS: WHY USE THEM?
As seen in our
article on Wills
and Trusts, in California and much of the nation the
typical family utilizes revocable intervivos trusts for their
estate plan instead of the standard will or testamentary trust of
several decades ago. Why has this particular form of estate plan become
This article shall
outline the main benefits of the revocable intervivos trust that cause
so many people to elect that type of structure for family estate
planning-and also explain why the popular misconception that one saves
estate taxes by use of such trusts is wrong-but that there are still
useful benefits to use of that trust structure.
DEFINITION OF TERMS:
The reader should
first review the more detailed article on estate planning seen in our
and Trusts. This section shall only discuss those terms
directly related to the topic of this article.
trust is simply a written document that creates an entity that holds
assets for the benefit of a person. They are uniquely American
creations and each state has its own laws governing how they work.
Normally, you have the Settlor or Trustor who creates the
Trust; the Trustee who has the
to hold the trust assets for the benefit of the Beneficiary.
The same person can occupy each role or they can be different
persons. One can create successor trustees who assume the duties
once the first trustee resigns or dies. You can have multiple
trustees, beneficiaries and trustors. The Trust instrument itself
sets the conditions for the holding of the property and its eventual
distribution to the beneficiary. Typically, a trust is transferred
certain assets that are held for a beneficiary’s lifetime or a set
number of years and during that time the income may be paid to the
beneficiary who may also have the right to take a portion out based
on need. At the end of a specified number of years or once the
beneficiary reaches a certain age, the trust terminates and the
assets go to that beneficiary or to a different person.
trust is one in which the Settlor has the right to terminate it at
will. Normally, its taxes are treated the same as the Settlor’s. The
IRS ignores its existence from a tax point of view since it can be
revoked at will.
An irrevocable trust cannot be revoked by the Settlor once it is
created. Usually, it is a separate taxable entity, much like a
A trust that is
created by a Will and only is effective once a person dies is a
INTERVIVOS OR LIVING TRUST:
A Trust created
while a person is alive is a “living trust” or “intervivos trust.” (Intervivos
is Latin for made while alive)
REVOCABLE LIVING TRUST ESTATE PLAN:
A husband and wife
jointly create a revocable intervivos Trust and each acts as joint
Settlors, Trustees and Beneficiaries. Either can revoke the Trust in
whole or part at will and each has the right to put assets into the
trust or take them out. From the tax point of view, the Trusts does not
exist. All income from the assets is paid back to the beneficiaries who
are also the trustees and trustors. Either can pull out any assets at
Upon the death of
the first spouse, the trust remains in effect and half of the assets,
representing the community property portion belonging to the deceased
spouse becomes irrevocable with its income being paid to the surviving
spouse and upon the death of the surviving spouse, going to the children
or grandchildren. While the surviving spouse lives, he or she has the
right to invade even the principle of the deceased spouse’s half of the
trust based on need. The surviving spouse’s half remains revocable until
his or her death.
Upon the death of
the surviving spouse, his or her half pours into the trust of the first
to die, and is distributed to the children or grandchildren once they
reach certain age or once certain events occur (such as going to college
or having babies, etc.)
A very short Will is
created which pours any assets not placed into the trust into the trust
upon the death of the person making the Will. This is done so that if
any asset is left out of the trust by mistake, it still is including in
the trust estate plan. These are called “pour over” wills.
SO…WHY USE THE ABOVE
REVOCABLE INTERVIVOS TRUST PLAN?
Trusts are long and complicated documents which require the Trustor to
transfer into the Trust the various assets that are to be held in Trust.
They cost several thousand to create, if truly complicated can cost over
five thousand dollars, and contain provisions that are complex and
lengthy. Why do it?
As seen in our article on
process to transfer assets via a Will usually requires a formal
proceeding in Court, called a “probate,” that not only takes close
to a year, but requires the Executor to file publically a list of
all assets and liabilities as well as the Will and its proposed
distribution. Most people do not want such private matters available
to anyone who wishes to visit the court house.
The costs of a formal probate are not minor. Both the executor and
the attorney for the executor are paid statutory fees that are a
percentage of the assets in the estate. For a typical one million
dollar estate, those fees can be in excess of thirty thousand
dollars each. The cost to create a trust and transfer the assets to
the next generation under a trust are a small fraction of that.
to notice required to creditors and the required timing of the
hearings in Court, a typical probate requires anywhere from between
nine months to three years to complete. A trust vests in the next
generation in months at most.
Assuming the correct provisions are drafted, the Trustee can be
required to take into account events that occur after death that the
deceased person would normally consider in dividing up the assets in
an estate. For example, assume a child becomes ill or disabled or is
suffering a very expensive divorce. The Trustee can be required to
either pay out more money…or hold money back for a time…predicated
on criteria the Settlor creates. Such clauses as a “Spend Thrift
Provision” can protect such assets from creditors of a beneficiary
or avoid cutting off other sources of assistance.
In various circumstances, taxes can be delayed or reduced by
appropriate use of the trust instrument. See our articles on
QTIP TRUSTS as an example. It is important to note
that a revocable intervivos trust does NOT save estate taxes in and
of itself…the existence of a revocable trust is ignored from the
point of view of the taxing authorities since they are revocable.
However they can delay and at times achieve good tax planning as
described in detail in the QTIP Trust article.
A trust can ensure that a portion of the estate will go to the
children or grandchildren. An often unstated but very real fear of a
spouse is that the surviving spouse will marry someone new and that
the new spouse will get all of the estate. Most people want to
protect their surviving spouse…but also want to know that some of
their assets will end up with the children or their issue if the
surviving spouse is not in real need. A trust can do that with that
portion of the community property that was owned by the deceased
spouse while at the same time making sure the entire estate is
available to the surviving spouse who is in real need.
DRAW BACKS TO USING
Most wills are a few pages long and relatively easy to understand. A
typical revocable intervivos trust is a dozen pages long and
requires explanation by competent counsel.
The surviving spouse normally will not have unfettered access to all
the money of the couple. His or her own half of the community
remains free to use, but the deceased spouse’s share, while perhaps
available for need, can not be used for merely anything that the
surviving spouse may want to use it for, such as risky investments
or luxury items.
A typical revocable intervivos trust will cost three or four times
as much as a simple will to create and will take twice as long to
complete the formalities of its execution. While still far less
expensive than probate, it is more expensive than a simple Will.
Successor Trustees must be selected to take over from the original
trustor/trustee/beneficiaries who created the document and that
requires finding three or four people you trust to handle the duties
for the next ten or more years. Unlike an executor who only serves
during the probate of the Will, a Trustee may be asked to serve a
long time and finding suitable persons is not always easy. We
usually recommend family members whenever possible.
While each family
has unique requirements for their estate planning, when all is said and
done most families use revocable intervivos trusts and, indeed, QTIP
Trusts, to save and delay further taxes. For those family with a spouse
who is not a United States citizen, the same plan can be utilized with a
few additional provisions to make it into a
QDOT Trust. The typical family will not only save tens of
thousands of dollars in probate fees, but can delay or eliminate some
estate taxes by appropriate use of the QTIP aspects of the Trusts. When
combined with the various advantages listed above, most families think
the cost benefit analysis recommends use of the Trust.