Advantages of a Living Trust Upon Death of Grantor

Advantages of a Living Trust Upon the Death of the Grantor.

Another major advantage of a revocable living trust, if property structured and funded, is the avoidance of probate upon the death of the Grantor.  Assets titled in the name of the trust are not subject to probate administration.  Consequently, if the Grantor’s assets are not titled in his or her name but rather are titled in the name of the trust, or if titled in the name of the Grantor are made payable to the trustee of the revocable living trust by a properly executed payable on death designation (i.e., non-probate transfer), complying with the Grantor’s directions as to the disposition of his or her property upon his or her death will be relatively easy to accomplish.

a.         Delays in continuity and distribution—Unlike the assets in the living trust, when an individual’s assets are subject to probate upon his or her death, no one controls these assets until the probate court appoints a personal representative (e.g., executor, executrix administrator, administratrix, as the case may be).  The appointment may not occur immediately and if delayed, a significant loss in the value of the estate may occur if no one has been appointed to dispose of the asset.  For example, if the decedent dies and owns a large volatile stock portfolio, the failure to have a manager, even for a period of one month (the typical time for the appointment of a personal representative), could have disastrous consequences.  If however, the stock portfolio is held in a revocable trust, there is no delay because the management and administrative powers held by the trustee are not interrupted by the settlor’s death.  See Hood, Mylan and O’Sullivan, Closely Held Businesses in Estate Planning (2d Ed.) at 8-6.

Even if the personal representative is quickly appointed after the death of the client, the assets in the decedent’s (deceased client) probate estate may be subject to the probate process for several months or years.  Even with the advent of independent administration of an estate, the personal representative generally is subject to more restrictions than would be a successor trustee of a revocable living trust.

In contrast, the successor trustee of a revocable living trust is not subject to the supervision of the probate court, and the funds in the trusts may be paid out to the beneficiaries at a much faster pace than if the assets were subject to probate administration.

b.     Avoidance of Excessive Costs and Fees—In many jurisdictions, the amount of the fees charged by the attorney who is hired by the probate estate as well as the fees charged by the personal representative “are determined, in part by the value of the probate assets.” Id. Hood, et. al.  Missouri is one of those states.  See MO Rev Stat. §473.153 (2000).

If not determined by this method, substantial “legal fees and probate costs will be incurred in complying with the requirements of the probate process” See Hood, et. al. 8-6 to 8-7.  Through the use of a revocable living trust, these fees and costs can be minimized and often avoided.  While it is true that trustee and attorney fees will be incurred by using a revocable living trust, these fees will likely be much smaller than the costs (executor fees, attorney fees and court costs) incurred in probating an estate.

Advantages for a Living Trust during Grantor’s Lifetime

 Advantages of a Living Trust During the Grantor’s Lifetime.

 (a)                Property Management—Most middle-aged grantors that establish a living trust name themselves as the trustee.  Frequently, the grantor may name his or her spouse as a Co-trustee so that the couple can operate their finances in a similar way as they did before the living trust was created.  As trustee, the Grantor operates with as much control as he or she had prior to the creation of the trust.  Thus, assets may be sold, purchased and investments may be made by the client free of restrictions, especially in light of the ability of the Grantors to change the terms of the trust or to revoke it entirely.  Alternatively, a client, especially an elderly client, may decide that an institutional trustee should be selected, either as sole trustee or co-trustee to manage the funded revocable trust.  If this option is chosen, the main motivation of the client is to shift the responsibility of the management of his or her finances to someone else especially if the client feels burdened by the financial management chore.

(b)               A Substitute for a Conservatorship Upon Incompetency.—One of the most important advantages of a revocable trust during the lifetime of the grantors is its great flexibility when dealing with the incapacity of the grantor(s).  In the event that the Grantor should become incompetent, management of assets by the grantor’s Co-Trustee or designated successor trustee is much preferable to a conservatorship.  Family members are reluctant to have a loved one (e.g., a spouse or a parent) formally adjudicated to be incompetent to handle his or her financial affairs.  Not only are such proceedings expensive, they are emotionally draining on all of the family members, especially if undesired publicity results from the proceedings.  While it is true that a durable power of attorney may be a viable alternative to a conservatorship, third parties, such as banks, are often more skeptical about their validity, especially if the instrument is several years old.  How well I remember a former student of mine informing me that a bank officer refused to honor the durable power given to him by his elderly father who could no longer handle his financial affairs.

 In summary, the use of a revocable trust has significant lifetime advantages for the Grantor and most of the time the attorney fees incurred in establishing it are more than justified considering the fees that would be incurred in establishing a conservatorship as well as the potential loss of asset value that may occur from the ineffective financial management by the client of his or her assets.

Traditional Living Trust

Traditional Living Trust

            There are two basic types of revocable living trusts. 

(a)                Self Declaration Revocable Trust─The first is the so-called self declaration of trust.  With this type of living trust the grantor in the trust document declares that he or she is holding property as trustee for the beneficiaries.  Frequently, the grantor, trustee and main beneficiary is the same person—the client who establishes the trust.  Of course, the trust provides for successor trustees upon the incapacity or death of the Grantor Trustee.  Such a self-settled trust also provides for successive beneficiaries after the death of the Grantor. 

(b)        Third Party Trustee Revocable Living Trust─The second type or revocable living trust is one in which property is transferred to another person or entity (e.g., a corporate trustee) for the benefit of the Grantor, who is the primary beneficiary during his or her lifetime with successive beneficiaries receiving the benefits of the trust upon the death of the Grantor.  Frequently, the Grantor and the Grantor’s spouse serve as the Co-Trustees in this type of third party trustee living trust arrangement.

 

During my years at the University of Iowa law school in the mid 1960s, we referred to this estate planning device merely as a revocable inter-vivos trust.  Subsequently, attorneys, including Kansas City estate planning attorneys, begin to use the term “living trust” to describe it because the trust becomes operative immediately upon its establishment during the lifetime of the Grantor (although it can still be changed or revoked during the Grantor’s lifetime assuming the Grantor has the mental capacity to do so).  In sharp contrast, a will does not become operative until after the death of the testator (the person who executed the will during his or her lifetime).

A Revocable Living Trust-An Overview

The use of a revocable trust in estate planning has two major advantages:  1) it is by far the most effective tool to assist an individual during the latter stages of his or her lifetime with the management of his or her property, especially when the individual is incapacitated; 2) it is a very effective tool, if properly funded, to avoid many of the unpleasant consequences of probate, namely, excessive probate fees and delays in accessing the individual’s assets after his or her death.

 There are several other advantages of a revocable living trust of which a qualified Kansas City estate planning attorney is well aware.  Before exploring these advantages it is necessary to provide some basic information for the uninformed.

 

1. 1.                  Revocable (Living) Trust Defined

A revocable (living) trust is created by a written agreement whereby an individual (referred to as the “Grantor” or “Settlor”) transfers property to a Trustee, either to another individual or a corporate Trustee, who holds and manages such property for the benefit of other persons who are referred to as the beneficiaries of the trust. A second type of revocable living trust is a self declaration of trust whereby the settlor declares himself or herself trustee of property owned by the settlor for the benefit of the settler and others.

 

(a)                Grantor (Settlor)—The grantor (also known as the “Settlor”) of the living trust is the person that establishes the terms of the trust agreement and who transfers property to the trust.  Clients are well aware that a will can be changed but often are worried that a trust can not be changed once established.  With a revocable living trust, however, the Grantor retains the power to alter or amend or revoke the trust.  Kansas City estate planning lawyers know that the ability to change or get rid of the document is why many clients view the living trust as an effective estate planning tool especially since it offers, as explained below, many features that a will does not.

(b)               The Trustee —When property is transferred to a trust, the person(s) or entity (e.g., a corporate trustee) becomes the legal title holder of the property.  Depending on the terms of the trust document, the Trustee may or may not have any beneficial interest in the property.  Key to the living trust, however, is the duties of the Trustee(s) who is under a fiduciary duty to manage the trust assets in accordance with the terms of the trust agreement and in the best interests of the beneficiaries.

(c)                The Beneficiaries—The beneficiaries of the Trust are those person(s) or entities (usually a charity) that are entitled to receive the benefits of the Trust in the form of income and/or principal distributions.

 

How is the Living Trust Established?

How is the Living Trust Established?

Despite the do-it-yourself books and on-line documents available on the internet, it is a very bad idea for a lay person or for that matter an inexperienced attorney to set up a living trust without hiring a qualified estate planning attorney to draft the trust agreement and to supervise the (i) execution of the document and related estate planning documents and (ii) the funding of the trust.  This latter task (funding the trust) is fundamental for a living trust to be an effective estate planning tool.  Too often an expensive estate plan is set up for a client but it is not properly funded.  In fact, some estimates indicate that more than 50 percent of living trusts are unfunded.  During the lifetime of the Grantor, only those assets placed in the trust will be controlled by the trust.  For example, absent other competing consideration (e.g., asset protection concerns or special issues concerning qualified retirement plans) titling real estate, bank accounts, CDs, mutual funds and other securities in the name of the trust is important to achieve the two principal goals of a living trust, namely (1) planning for your incapacity during your lifetime and (2) avoiding probate upon your death.  If it is not advisable to place certain assets in trust when it is established, then other techniques are available to assure that assets are placed in the trust at the death of the Grantor without utilizing probate (e.g., transfer on death designations).