Estate Planning with the Revocable Inter Vivos Trust

January 31, 2017

 

The revocable inter vivos trust is the most commonly used estate planning tool.  This article will briefly examine the nature of the revocable inter vivos trust and some of the beneficial effects that can be achieved by employing it in an estate plan.

 

What is a Trust? 

A trust is a legal entity to which the creators of the trust (known as the trustors or settlors) transfer some or all of their assets for the purpose of having those assets held, administered, and distributed by a trustee  in accordance with the trustors’ legally-binding directions.  The directions are contained in the document signed by the trustors that establishes the trust, called a declaration of trust or a trust agreement.  The term “declaration of trust” is used in this article.  The persons for whose benefit the trust exists are known as the beneficiaries.

 

What is a Revocable Inter Vivos Trust? 

A revocable inter vivos trust, also referred to as a living trust, is a trust which comes into existence when the declaration of trust is signed by the trustors, and which can be revoked or modified by them should they later desire to do so.  The revocable inter vivos trust is to be contrasted with the irrevocable inter vivos trust, which the trustors cannot revoke, and with the testamentary trust, which is a trust contained in a will and which cannot come into existence until probate administration of the trustor’s estate has been completed. 

 

The Doe Family Trust

Consider a hypothetical married couple, John and Jane Doe, who decide to establish a revocable inter vivos trust, which we will call The Doe Family Trust.  What estate planning goals can John and Jane achieve with their revocable inter vivos trust?

 

 

 

Retention of Control of Assets 

The declaration of trust provides that John and Jane will be the trustees and beneficiaries of the trust during their lives.  This means they will manage the trust assets for their own use and benefit.

 

Providing for Incapacity.  Assume that John and Jane later become incapacitated.  The successor trustee named in the declaration of trust, who may be one of John’s and Jane’s adult children or any other person they have designated in the declaration of trust, can step in and assume management of the trust assets for John’s and Jane’s benefit without the need for judicial conservatorship proceedings.

 

Avoidance of Probate

Assets held in trust are not subject to probate.  While probate offers the advantage of judicial oversight of the administration of a decedent’s estate, it has several disadvantages which frequently make probate avoidance desirable.  Among these are cost, delay, procedural complexity, and loss of privacy (probate court files are public records). 

 

 

Flexibility in Dispositive Provisions

When it comes to providing for beneficiaries, the trust is the most flexible estate planning tool.  The key to this flexibility is the fact that the trust can continue in existence long after the deaths of the trustors.  Consider the John and Jane situation, and assume that John predeceases Jane.  Typically, the Doe Family Trust will continue after John’s death for Jane’s benefit for the remainder of her life.  When Jane dies, a successor trustee named in the  trust will take over the duties of trustee and will continue to hold, administer, and distribute the trust assets in accordance with the provisions of the trust.  The beneficiaries of the trust at this point may be John’s and Jane’s children, grandchildren, other relatives, nonprofit organizations, and any number of other persons or entities specified in the trust.  The manner in which the benefits of the trust flow to the beneficiaries is directed by the terms of the trust found in the declaration of trust.  The trust may provide for outright distribution of shares of the trust estate to John’s and Jane’s adult children.  It may provide that the shares of minor children or young adults are to be held in trust by the trustee until a certain age is reached, with payments permitted to or for the benefit of those beneficiaries for support, education, medical care, or other valid purposes.  The trust may provide that certain beneficiaries’ shares are to be held in trust for the duration of their lives, with distribution of income and limited distributions of principal authorized.  The trust may provide that the share of a disabled beneficiary who is receiving needs-based government benefits (such as SSI) will be held in a “special needs trust” that is designed to provide economic well-being for the beneficiary without jeopardizing his or her eligibility for government benefits.  These are just a few examples of the wide variety of dispositive arrangements which can be directed by the trustors in the declaration of trust.    

 

Minimization or Elimination of Federal Estate Tax 

For estates large enough to be subject to federal estate tax, provisions can be included in the trust designed to reduce or eliminate estate tax liability on the deaths of the trustors.

 

Protection of the Estate of the First Spouse to Die

An important benefit of a properly-drafted revocable inter vivos trust is that the estate of the first spouse to die can remain available for the benefit of the surviving spouse during his or her life, but be shielded from certain risks which may arise during the remaining life of the surviving spouse.  Assume John dies and is survived by Jane, and both have children from prior marriages.  A properly-drafted and administered trust can facilitate preservation of John’s estate so that, when Jane dies, John’s estate can pass to the beneficiaries intended by John.  If, for example,  John’s and Jane’s trust is valued at $2,000,000 and consists entirely of community property, a properly drafted trust can eliminate, or at least minimize, the likelihood that the following situations could occur to John’s half of the trust assets ($1,000,000) during the remainder of Jane’s life: (1)  Jane remarries and her new spouse squanders the trust assets; (2)  Jane remarries and her new spouse persuades her to change the beneficiaries of the trust (for example, to his children); (3)  dishonest persons defraud Jane and severely deplete the trust estate; (4) Jane incurs unforeseen liability (e.g., a car accident) which severely depletes the trust;  (5) Jane has an unfriendly relationship with John’s children from a prior marriage, and modifies the trust to leave everything to her children when she dies, notwithstanding that John wanted his children to receive his estate after Jane died. 

 

Conclusion

Because of the many beneficial attributes of the living trust, such as those  discussed above, the living trust is the central component of virtually every estate plan.  If you would like to discuss how a living trust can enable you to carry out your estate planning intentions, or if you would like to learn about other estate planning tools that you may want to consider, such as wills, durable powers of attorney, and health care directives, please call to schedule a consultation with one of our estate planning attorneys. 

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