What Is A Revocable Trust?

1. What Is A Revocable Trust? • An inter vivos (living) trust, created during life, is a three-part relationship between: • Grantor – person establishing the trust • Trustee – person holding legal title and holding property for the benefit of another • Beneficiary – person holding beneficial (equitable) title in the trust property • Can be established for limited period of time, until occurrence or nonoccurrence of a specific event, or it can continue after the death of the grantor

2. What Is A Revocable Trust? (cont’d) • The Grantor retains the right to: • Revoke the trust, • Change the trust terms, or • Regain possession of trust property • The trust becomes irrevocable at the earlier of the Grantor: • Dying • Giving up all rights to revoke, amend, alter, or terminate the trust and relinquishing title to the assets placed in the trust

3. When Is Use Of A Revocable Trust Appropriate? • Grantor wants someone else to manage all or a portion of Grantor’s property • Grantor wants continuity in management and income flow of business or other assets in the event of death or disability • Grantor wishes to protect against his own incapacity (physical, mental, or legal) or the incapacity of beneficiaries • Grantor desires privacy in the administration of assets during life and at death

4. When Is Use Of A Revocable Trust Appropriate? (cont’d) • Grantor wants to minimize estate administration costs and delay at death by avoiding probate • Grantor wants to see the trust and trustee in operation prior to death • Grantor wishes to avoid ancillary probate and administration of assets in other states • Grantor wishes to reduce the potential for an election against or contest of the will • Grantor would like to select the state law governing the trust

5. What Are The Requirements? • Competent Grantor and Trustee • Assets titled in the name of the trust, also known as trust principal, res, or corpus • Three-part relationship including: • Grantor also known as settlor or trustor • Trustee • Beneficiary • Income beneficiary – person who receives income from the trust for life, a set term, or the occurrence or non-occurrence of an event • Remainder person – ultimate beneficiary of the trust property

6. How It Is Done – Examples Individual • Individual worried about asset management upon incapacity or death, wants to avoid time, expense, and publicity of court guardianship process and probate • Individual sets up living trust • Individual acts as the initial trustee of trust and appoints a trusted friend or relative as successor trustee or successor co-trustee with a corporate fiduciary, upon incapacity or death

7. How It Is Done – Examples (cont’d) Individual (cont’d) • Assets should be titled in the name of the trust • A springing power of attorney may be granted to an agent to title assets in the trust name upon incapacity • A will with a “pour over” provision will effectively place assets in the trust after death, but will not avoid probate or provide for incapacity • A revocable living trust, unlike adding someone to a joint checking account, will not create unintended gifts, will hold a greater breadth of assets, and the successor trustee will be held to a fiduciary standard

8. How It Is Done – Examples (cont’d) Married Couple with Minor Children • has estate under their individual estate tax exemption amounts, want to maximize spousal control • Each spouse sets up his own living trust • Each spouse is usually the initial trustee of his own trust and may appoint his spouse as successor trustee and a corporate fiduciary as successor trustee to the spouse, until children reach a specified age • Each spouse owns a life insurance policy on himself with the spouse as primary beneficiary and the trust as contingent beneficiary

9. How It Is Done – Examples (cont’d) Married Couple with Minor Children (cont’d) • Any 401(k) or IRA plans may also name the spouse as primary beneficiary and the trust as contingent beneficiary • Other assets are titles as joint tenants with right of survivorship or as tenants by the entirety Note: Assets titled as joint tenants with right of survivorship or as tenants by the entirety will not be available to fund the trusts at the first death, and will go through probate at the second death, unless retitled into the name of a trust

10. How It Is Done – Examples (cont’d) Married Couple with Large Estate • Married couple with an estate over their individual estate tax exemption amounts wants to maximize use of their exemptions • Each spouse sets up his own living trust • Each spouse is usually the initial trustee of his own trust and may appoint his spouse as successor trustee or successor co-trustee with a corporate fiduciary • Each trust contains an A/B or marital/family trust provision

11. How It Is Done – Examples (cont’d) Married Couple with Large Estate (cont’d) • The trusts may also contain a QTIP provision if specific remainder beneficiaries are desired • The trusts may contain a reverse QTIP provision to maximize the use of each spouse’s GST exemption • KEY  Assets are divided and retitled into either the husband’s living trust or the wife’s living trust Note: Assets titled as joint tenants with right of survivorship or as tenants by the entirety will not be available to fund the trusts at death

12. Tax Implications • Federal Income Tax: • All income taxed to the grantor at grantor’s tax rate • Grantor considered owner of trust corpus • Gift Tax: • Not triggered upon establishing or funding • Triggered when trust becomes irrevocable and the gift is complete • Federal Estate Tax: • Entire trust corpus will be includable in the grantor’s estate for federal estate tax purposes

13. Issues In Community Property States • In community property states the revocable inter vivos trust will have 2 grantors • Be careful not to trigger accidental gifts between spouses under state law • To maintain the community character • The transfer should be made from the husband and wife directly to the trustee • Each spouse should retain the right to revoke • The instrument should specifically provide that the character of the trust property remain community, both in the trust and upon withdrawal

14. Revocable Trust With S Corp Stock • The only trusts eligible to hold S-Corp stock are: • Voting trusts • Trust receiving stock under a will (2 year limit) • Grantor trusts, which include revocable living trusts • Qualified subchapter S trust (QSST) • Electing small business trust (ESBT) • IRC Section 678 trust where person other than the grantor is treated as owner

15. Pour-Over Trust A type of revocable inter vivos trust into which client assets can be poured from a will, life insurance, pension or profit sharing plan, or other employee benefit plan

16. Contingent Trust • A contingent or standby trust takes over management and investment of assets when the grantor is no longer able to do so • The trust is triggered by a specific occurrence of a grantor’s physical, mental, or emotional incapacity as defined in the trust • The trust is usually coupled with a durable power of attorney • Usually the trust names a corporate trustee as successor or co-successor with another person after the grantor becomes incapacitated

17. Administrative Trust An administrative trust is simply the term for a revocable trust immediately after the death of the grantor, where it is to be further divided into separate trusts such as Marital (A) and Bypass (B) trusts