C—Revocable Living Trust

A revocable trust is a trust wherein the creator or grantor retains the right to alter, amend or revoke the agreement during his lifetime and recover the property for himself. A living trust is simply one which is created to take effect during the lifetime of the grantor, as distinguished from a testamentary trust, which does not become operative until death.

The revocable living trust (RLT) is a will substitute that can accomplish many estate planning objectives. It is an agreement established during the grantor’s lifetime that may be amended or revoked at any time prior to the grantor’s disability or death. The primary advantages of the RLT include: (1)providing for the management of grantor’s assets upon his mental or physical disability thus avoiding conservatorship proceeding; (2) reducing costs and time delays by avoiding probate; (3) reducing the chances of a successful challenge or election against a will; (4) maintaining confidentiality by not having to file a public will; and (5) avoiding ancillary administration of out-of-state assets.

Two additional documents are typically executed together with the RLT:

• The durable power of attorney authorizes the power-holder to act for the grantor when the grantor is disabled.
• The pour-over will functions as a “fail safe” device to transfer at death any remaining probate assets into the RLT, to undergo minimal probate as a means of clearing the estate of creditor claims, and to appoint guardians of any minor children.

DURING LIFETIME. The grantor establishes the RLT and typically names himself as the sole trustee. Following creation of the trust the grantor retitles and transfers his property to the trust. Because the grantor maintains full control over trust assets there are no income, gift, or estate tax consequences.

UPON DISABILITY. If the grantor becomes disabled due to legal incompetency or physical incapacity, a designated successor trustee steps in to manage the grantor’s financial affairs.⁷ Disability is determined under trust provisions providing a standard of incapacity (e.g., certification by two physicians that the grantor is unable to manage his financial affairs). Also, during the grantor’s disability, the holder of the durable power of attorney is authorized to transfer additional grantor-owned assets to the trust.

UPON DEATH. The RLT becomes irrevocable when the grantor dies. Under the grantor’s pour-over will, any probate assets not previously transferred to the RLT during lifetime are transferred to the RLT as part of the grantor’s residuary estate. Assets held in trust are then disposed of according to the terms of the trust. This can include an outright distribution to the trust beneficiaries, or the trust may contain provisions establishing separate tax-savings subtrusts similar to the marital and family trusts under the exemption trust will.

Although the RLT is not for everyone, it clearly offers substantial benefits for many individuals. The utility of a funded revocable trust increases with the grantor’s age, when there is an increased likelihood of incompetency or incapacity and the need for asset management.