Aging: Taking Care of Business

Chapter 5 - Revocable Living Trusts

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What is a "Trust"?

A Trust, like a Durable Power of Attorney for Finances, is a document which gives authority to another to manage one’s money and property. Under a typical Trust, one person (called a “Trustor” or “Settlor”) allows someone (called a “Trustee”) to control his property and to make it available for the benefit of himself or others (called “Beneficiaries”). Unlike a DPOA, a Trust is usually a very long and very detailed document in which the Trustee must follow specific instructions as to how the money and property should be handled. Another difference is that the Trust may continue in effect after the death of the person who created it, unlike the DPOA. The individual named in the Trust to control the property (the Trustee) may be yourself, a friend or family member. Or the Trustee may be a professional such as a bank official, attorney or financial advisor who brings financial or legal expertise to the management of a large or complex estate and who is paid for doing so.

The use of a Trust may be worthwhile for people who have substantial estates. It may also be useful for people of modest means who have a complex family issue requiring detailed estate planning, such as the need to plan for the care and support of a disabled adult child or other dependent.

Trusts are used for a variety of purposes, including: to save on estate and income taxes; to provide support for a dependent after one dies or becomes incapacitated; to distribute property after death; to protect land from development; and to make gifts to charity. To explain all these different types of Trusts would be beyond the scope of this book. If you are interested in learning more about any of the above, it is advisable to speak to a lawyer.

It is, however, useful to explain one particular type of Trust which may be used in planning for incapacity and which has recently received a lot of attention: the Revocable Living Trust.

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The Revocable Living Trust

A Revocable Living Trust (also called a “Living Trust”) is a Trust which is set up and takes effect during a person’s lifetime (unlike some other Trusts which may not take effect until a person’s death). The Living Trust remains under the person’s control until he or she becomes incapacitated or dies.

One of the reasons some people choose to execute a Living Trust is that it does “double duty”:

  • It can be used like the Durable Power of Attorney for Finances to designate a person to make financial decisions for you when you become incapacitated, and
  • It can also be used in place of a Will to distribute your property after death.

The Living Trust should not be confused with the Living Will. The Living Trust deals only with property; it does not provide for decisions regarding your health care as the Living Will does.

Forming a Living Trust is very much like forming your own company with you as the only employee. This is how it works:

  • You transfer ownership of your property from your individual name to a "Trust."
  • In the Trust papers, you name yourself as Trustee, the person who will control the money and property, for as long as you are competent to manage your own affairs. Spouses usually create the Trust together and are “Co-Trustees.”
  • You name a “Successor Trustee” to take over management of the money and property in the Trust when either you become incapacitated or die.
  • You give specific directions in the Trust document as to exactly how your money should be spent and your property managed by the Successor Trustee if you become incapacitated.
  • In addition, you give instructions as to how the Successor Trustee should distribute your property when you die.

Once the Living Trust is in place and you transfer your property into it, the Trust is the legal owner of the property. As the Trustee, however, you continue to control your property and spend your money just as you did before. You have the right to revoke the Trust or change its terms, including the names of the Beneficiaries or the Successor Trustee.

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How the Living Trust Works When You Become Incapacitated

Typically, the Living Trust document directs that control of the money and property goes to the Successor Trustee if a health professional (usually your attending physician) certifies that you are mentally incapacitated, The Successor Trustee manages the money and property according to the details in the Trust document. The Successor Trustee will use it to meet your needs. At that point you will be a Beneficiary of the Trust. The Trust may also spell out what the Successor Trustee is supposed to do with the rest of the money such as providing support to other relatives, giving to charity or making investments.

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How the Living Trust Works When You Die

When you die, the Successor Trustee will distribute your property according to your instructions. The property does not go through the Probate Court as it would if you used a Will to pass on your property. By avoiding the probate process you may avoid the delays which sometimes occur as well as some costs. You can also keep your affairs private since the Living Trust, unlike a Will, is not filed with the Court or open to public inspection.

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Preparation of a Living Trust

As stated earlier, the Living Trust is most useful for people who have substantial estates. Because a Living Trust must be carefully written by a lawyer and tailored to your own situation, the preparation of it is costly. A typical fee may be several thousand dollars for the attorney to write the Trust and transfer the titled property that you designate into the Trust. This will include your home, other real estate, motor vehicles, bank accounts, stocks, bonds and so forth. In the case of your home and any other real estate, you must have new deeds prepared and recorded in the Registry of Deeds. If the house is under mortgage, you will have to get the bank or other holder of the mortgage to agree to this

When executing a Living Trust, it is also wise to execute a “back-up” Will. This will serve to pass on any property which did not get transferred into the Trust either because you overlooked it or acquired it after you became incapacitated.

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Advantages of the Revocable Living Trust

Many of the advantages of a Living Trust are referred to above. They are:

  • Until you are considered incompetent by your physician or other health professional, you have complete control over your money and property.
  • You can revoke the Living Trust whenever you want as long as you are still competent. There may be some costs involved in this, however, since you will need to transfer title of property from the Trust back into your own name.
  • You can change the person named as Successor Trustee, the named Beneficiaries and other terms of the Trust.
  • The Living Trust enables people with substantial estates to arrange for a professional with financial expertise to serve as Successor Trustee for the purpose of dealing with complex financial, tax and legal issues.
  • Banks and other professionals may be more comfortable managing money under a Trust document than under a Durable Power of Attorney for Finances.
  • The Living Trust document allows you to give detailed instructions as to how your money is spent and your property managed.
  • You can use the same document to plan for incapacity and for the distribution of property after death.
  • By using a Living Trust instead of a Will, you can maintain privacy about how much property you have and to whom you are leaving it. (A Will, filed with the Probate Court after death, is a public document open to anyone who wants to see it.)
  • The Living Trust may prevent delays in the distribution of your property after your death because your money and property will not have to go through the probate process.

The Living Trust may also save your estate money leaving more money for Beneficiaries. This depends on the size of your estate and the complexity of your estate plan. When a Will is probated, fees must be paid to the Court and to attorneys. These costs are avoided when you use a Living Trust to distribute your property after your death. These savings, however, may be offset by expenses associated with the preparation of the Living Trust which are likely to be several thousand dollars.

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Disadvantages of a Revocable Living Trust

  • A Living Trust may not be necessary for people whose estates are modest and uncomplicated.
  • The fees for preparing a Living Trust may be higher than the costs associated with having a Will prepared and administered.
  • The probate process may move along fairly quickly for small estates which do not involve disputes between heirs or creditors. Consequently, a Will may be a simpler and less expensive way to pass on your property than a Living Trust.
  • Similarly, the Durable Power of Attorney for Finances may be less expensive and more appropriate for smaller estates than the Living Trust in planning for incapacity.

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