By Patrice M. Ticknor, Esq.

A revocable living trust is a legal relationship where a trustee holds title to trust assets for the benefit of the trust beneficiary. The person who creates the trust and transfers his or her assets to it is called the grantor or settlor.  The trustee is the person who holds title to the trust assets and administers them in accordance with the governing trust agreement for the benefit of the trust beneficiary or beneficiaries.  The grantor is usually the sole trust beneficiary during his or her lifetime.  In most cases, the grantor also serves as a trustee.

The governing trust agreement is the document by which the grantor sets forth instructions detailing how the trust assets should be administered during the grantor’s life, during the grantor’s possible incapacity, and after the grantor’s death.

Because the grantor reserves the right to change or terminate the trust, the grantor can withdraw assets placed into the trust, distribute trust income to himself or herself, sell assets, or add assets to the trust. The grantor maintains total control over the trust.

Because the grantor can revoke the trust at any time during his or her life, the Internal Revenue Service treats the trust assets just as though the grantor continues to personally hold ownership of the trust assets.  Therefore, during the grantor’s lifetime, a separate income tax return is not needed for the trust and the trust will not have its own tax identification number – instead the trust will use the grantor’s social security number.  For the same reasons, the trust assets are not protected from the grantor’s creditors.

While the Grantor is Alive and Well

While the grantor is alive and well, the trust agreement will specify how the trustee should invest and spend the trust assets for grantor/beneficiary’s benefit during his or her lifetime. If the grantor is also trustee, he or she will manage the assets that have been transferred to the trust.  If someone else has been appointed trustee, the trustee must typically follow the grantor’s instructions.

If the Grantor becomes Mentally Incapacitated

The trust agreement will also specify what happens if the grantor becomes mentally incapacitated and can no longer manage his or her affairs and those of the trust. The trust document may name a successor trustee to step in and take over management of the trust assets under these circumstances. Alternatively, the grantor may have named a co-trustee at the creation of the trust who will act alone to manage the trust upon the grantor’s incapacity.

The Grantor’s Death

A revocable trust automatically becomes irrevocable when the grantor dies.  That is, the trust can no longer be revoked or changed.  The surviving co-trustee or the named successor trustee will pay the grantor’s final bills, debts, and taxes and then distribute the remaining assets to the trust’s beneficiaries according to the instructions contained in the governing trust agreement.  If all of the grantor’s assets have been transferred to the trust during the grantor’s lifetime, the successor trustee or surviving co-trustee can administer the trust and then distribute the trust’s assets to its beneficiaries without a probate proceeding or the involvement of the probate court.

Some Differences Between a Trust and a Will

Unlike a will, a trust is not only a vehicle for disposing of a grantor’s assets at his or her death, it is also a vehicle for the management of assets and investments during the grantor’s life.  This lifetime management feature can be particularly useful if the grantor becomes incapacitated or otherwise unable to manage trust assets.

The necessity of probate is also a major distinction between a revocable living trust and a will.Probate is a court-supervised process that is required when a person (the decedent) dies leaving assets to be administered and distributed.  Whether or not a decedent leaves a will, his or her assets must pass to his or her heirs and/or beneficiaries. Probate is the legal process by which this is accomplished.

A revocable living trust does not require probate. It is sometimes described as a private contract between the grantor and the trust entity. As set forth above, usually the grantor serves as the trustee of his or her own trust, managing the property placed within it. The successor trustee or surviving co-trustee steps in to take over when the grantor dies, settling the trust and distributing its property to the beneficiaries named in the trust documents.

When a will is submitted to the court for probate, it becomes a matter of public record.In contrast, no one other than the beneficiaries are entitled to see the trust documents. They will not become public record unless an heir or beneficiary begins a proceeding in probate court concerning the validity, interpretation, or administration of the trust.

For further information regarding your estate planning needs, please contact Patrice Ticknor at 313-496-1200 or pticknor@berrymoorman.com, or a member of Berry Moorman’s Estate Planning Group.