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 so popular?

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 article Wills and Trusts. This section shall only discuss those terms directly related to the topic of this article.

 

  1. TRUST: a 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 fiduciary duty 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.
  2. REVOCABLE TRUST: A revocable 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.
  3. IRREVOCABLE TRUST: An irrevocable trust cannot be revoked by the Settlor once it is created. Usually, it is a separate taxable entity, much like a corporation.
  4. TESTAMENTARY TRUST: A trust that is created by a Will and only is effective once a person dies is a Testamentary Trust.
  5. 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)

 

TYPICAL CALIFORNIA 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 will.

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?

 

Revocable Intervivos 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?

 

THE ADVANTAGES:

 

  1. Privacy. As seen in our article on probate, the 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.

  2. Cost. 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.

  3. Time Required. Due 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.

  4. Flexibility. 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.

  5. Tax Benefits. 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.

  6. Protection of Children. 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 A TRUST

 

  1. Complex. 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.

  2. Restrictions on Future Use. 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.

  3. Costs. 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.

  4. Need For Trustees. 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.

 

WORTH IT?

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.

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Wills and Trusts
Trusts