Revocable living trusts
are often promoted as
an effective alternative to probate for transferring property when
you die. Even though Oregon’s probate system is among the simplest
and least expensive in the nation, many citizens are attracted by the
possibility of even quicker and easier asset transfers. But revocable
living trusts have some drawbacks. To help you decide if a revocable
living trust is right for you, here are answers to some of the most
frequently asked questions about these trusts.
What is a revocable living trust?
A revocable living trust is a legal device that can be used to manage
your property during your lifetime and to distribute your property
after your death.
A revocable living trust is established by a written
agreement or declaration, which appoints a "trustee" to administer
the property transferred to the trust, and which gives detailed instructions
on how the property is to be managed and eventually distributed. If
you want your trust to substitute for a probate proceeding (court administration
of property after death), you must give the trustee detailed instructions
about how to handle these situations, and you should legally transfer
substantially all of your property to the trustee. A revocable living
trust agreement or declaration is usually longer and more complicated
than a will, and transfer of assets to the trustee can be time-consuming
and expensive. Any competent adult can establish a revocable living
trust.
Who can be the trustee?
In Oregon any competent adult can be the trustee, including the person
setting up the trust. An Oregon bank or trust company can also act
as trustee. A professional fiduciary that is not an Oregon bank or
trust company can act as trustee, if a court appoints it and it posts
a bond. You can appoint more than one trustee, delegating different
duties to each trustee if you wish, and you can retain the power
to remove the trustee and appoint a new one. Appointing a successor
trustee is essential if you are the first trustee and the trust will
carry on after you die or become incapacitated.
How is a revocable living trust established?
If a revocable living trust is appropriate for you, you will need a
written agreement or declaration of trust, which sets out your plan
for management and distribution of your assets. Then you must legally
transfer all trust assets to the trustee. Deeds, stock transfers,
new bank accounts and other legal documents may be necessary. Assets
not formally transferred to the trustee will not be considered part
of the trust and might still be subject to probate.
You must also have a will to ensure that any property
not properly placed in your trust before death can be transferred to
it after death.
At your death your will can transfer up to $50,000 of
personal property and $150,000 in real property to your trust through
an affidavit filed with the court. Your will can transfer assets of
greater value to your trust through the probate process. You can also
have life insurance and certain pension accounts paid directly to the
trust.
Here is an example of how trust assets should be registered: "John
Doe, Trustee Under the Marty Smith Trust Agreement Dated January 1,
1990." The trustee should not hold trust assets individually as "John
Doe" without the additional information. The trustee must keep
separate records for trust assets and might have to file separate income
tax returns for the trust. If the trustee does not obey these rules,
the trust may not avoid probate.
Probate and revocable living trusts
Probate is a legal process for transferring your property when you
die. It is supervised by a court.
Probate usually involves validation of your will, appointment
of a personal representative, collection of your assets, notification
of and payment to your creditors, and transfer of your property to
the beneficiaries under your will. Probate creates a public record
for the administration of your estate. This public record includes
all of your assets that are subject to probate and their value at the
time of your death.
A revocable living trust avoids the public process of
probate, because you collect your assets and transfer them to the trustee
before you die. The trustee then transfers your assets to your beneficiaries
after your death. If you establish a trust but fail to transfer your
assets to your trustee, you will not avoid probate.
If you die owning real estate outside Oregon, a court
proceeding might be required in each state where real estate is located.
A revocable living trust can avoid these extra court proceedings only
if that property is transferred to your trust.
Sometimes it is not a good idea to avoid probate. For
instance, in a probate proceeding, your personal representative has
special powers to deal with your creditors and can force them to file
claims with the court or lose their claims. The trustee of a revocable
living trust now has similar, optional powers to deal with creditors;
however, using these powers may require some additional expense and
delay, as in probate.
Even if you want to avoid probate, there may be better
ways to do it. Joint tenancy ownership of specific assets, with the
right of survivorship, can be a cost-effective way to avoid probate
on the death of the first joint owner. There are several ways to pass
bank accounts at death without probate, including joint accounts with
right of survivorship, trust bank accounts, and so-called "payable
on death" accounts. Most pension plans and life insurance policy
proceeds pass under beneficiary designations that avoid probate without
use of a revocable living trust. Depending on the nature and amount
of property, one or more of these non-probate devices could be a less
expensive way for you to avoid probate. Be aware though, that some
of these non-probate devices can result in consequences relating to
taxes, eligibility for publicly provided long-term care, and loss of
independent control over an asset.
What is a conservatorship?
Conservatorship is the legal process for management of your property
and providing for your financial needs when you become incapacitated.
If a court determines you can no longer handle your financial affairs,
a conservator is appointed. The conservator must list your assets
in the court file, manage your property under court supervision and
file periodic accountings with the court.
If you transfer all of your assets to a revocable living
trust and give your trustee detailed instructions on how to handle
your assets if you become disabled, there should be no need for a conservatorship.
Your written agreement or declaration can specifically authorize your
trustee to rely on a letter from your physician as proof of your incapacity.
A conservator can establish, or fund, a revocable living
trust if: 1) the trust would be a more efficient way to administer
the property of the incapacitated person; and 2) use of the trust would
be consistent with the person’s overall estate plan. A special
court order is needed to do this, however.
Durable power of attorney
A durable power of attorney may serve as a relatively inexpensive way
to avoid conservatorship.
This document appoints another person as your "attorney
in fact" to handle your assets. A durable power of attorney may
briefly and generally describe the authority of your attorney-in- fact,
or it may specifically itemize, in great detail, the actions that you
authorize your attorney-in-fact to take on your behalf. A durable power
of attorney is less expensive than a revocable living trust, because
it involves no transfers of assets and no estate distribution plan
upon your death.
However, durable powers of attorney frequently give no
direction to your attorney-in-fact regarding your plans for investments,
money management or distribution. They generally contain no written
restrictions on their use.
With a revocable living trust, it is possible to not
transfer all assets to the trustee immediately, but specifically to
authorize the attorney-in-fact to finish funding the trust if you become
incapacitated. This approach will not avoid probate, however, if the
trust funding is not completed before you die, because the power of
attorney dies with you.
Does a revocable living trust avoid taxes?
By itself, a revocable living trust does not avoid income, estate or
gift taxes. Provisions for saving estate and gift taxes can be included
in a revocable living trust or in a will. Whether your assets are
held in a trust or not, a state estate tax return must be filed after
you die if your property exceeds $1 million in value for the year
2006 and beyond, and a federal estate tax return must be filed after
you die if your property exceeds $5 million in value.
You should not set up a revocable living trust just to save taxes.
What does a revocable living trust cost?
The exact cost of a revocable living trust depends on how complicated
your assets and your estate planning goals are, how many assets must
be transferred to the trustee, and whether tax planning is needed.
Before you direct an attorney to set up a trust for you, ask for
estimates of how much it will cost, how much writing a will would
cost and how much probating your estate would cost.
If you do not plan to serve as your own trustee, you
should consider any fees you might want to pay the trustee and whether
those fees would replace fees that you are already paying to manage
your assets.
A revocable living trust plan should include the trust
document, the transfer of assets to the trust, a "pour over" will
to add any other assets to the trust, and a durable power of attorney.
It also might include related legal documents, such as an advance directive
regarding medical decisions and a certification of trust, which summarizes
important trust terms and information.
Advantages of a revocable living trust
Avoidance of probate. In particular,
a revocable living trust can avoid expensive multiple probate proceedings
when you own real estate in several different states, as well as
the publication of the otherwise private financial details of your
estate.
Avoidance of conservatorship. A
revocable trust can avoid the additional cost of a conservatorship
in the event of your incapacity.
Efficient distribution. A revocable
trust can reduce delays in distributing your property after you die,
although delays caused by filing an estate tax return cannot be avoided.
Confidentiality. Generally the
terms of your living trust are confidential, with only your named
beneficiaries and trustee having access to that information.
Continuity. A trust can provide
continuity of management of your property after your death or incapacity.
Disadvantages of a revocable living trust
Expenses of planning. A revocable
living trust is more complicated than a will to draft, and asset
transfers can take time and can result in additional costs.
Expenses of administration. If
you appoint a bank or trust company as trustee, you will have fees
to pay (though these may take the place of investment advisory fees
and other fees you are already paying). Setting up a revocable living
trust will not eliminate the need for professional services of attorneys
and accountants in the future.
Inconvenience. Once the trust
is established, you must be sure that trust books are maintained
and that all assets continue to be registered to the trustee. Persons
dealing with the trustee (such as banks and title insurance companies)
may want to review the trust instrument to check on the trustee’s
powers and duties.
Unforeseen problems. Revocable
living trusts can raise a variety of new problems regarding the ability
to borrow against property, title insurance coverage, real estate
in other countries, Subchapter-S stock, certain pension distributions,
and many other issues. Only a skilled attorney familiar with estate
planning can tell you whether, on the whole, a revocable living trust
is right for you, your family and your assets.
Complexity. Revocable living
trusts often are more complicated than wills and can leave you confused
about an estate plan that will require your attention and management
for an indefinite period of time.
Legal Editor: Tim McNeil, 2008; minor update August 2011.
