Revocable living trusts are often promoted as an effective alternative to probate. Even though Oregon’s probate system is relatively simple and inexpensive, many people seek an even quicker and easier mechanism for transferring the assets of a deceased person to the beneficiaries of that person. Revocable living trusts often serve this purpose, but they often create problems, too. 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.
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 should legally transfer substantially all of your property to the trustee, and you should provide instructions to the trustee regarding how to distribute trust assets after your death. 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.
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.
IIf 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 most trust assets to the trustee. Deeds, stock transfers, new bank accounts and other legal documents may be necessary. Some assets, such as IRAs and annuities, should not be transferred to the trustee. An attorney and accountant should be consulted regarding the specific assets that should be transferred to the trustee. Assets not formally transferred to the trustee may not be considered part of the trust and might still be subject to probate.
A will also plays a role in most estate plans that include a revocable living trust. In these estate plans, the will ensures 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 $75,000 of personal property and $200,000 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 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, it is unlikely that you will 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. With regard to real property, you can execute a transfer-on-death deed which allows the death beneficiary named on the deed to automatically assume ownership of the property upon your death, with no need for probate. 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 creditors, taxes, eligibility for publicly provided long-term care, and loss of independent control over an asset.
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 define a process for establishing that you are incapacitated. In some revocable living trusts, your trustee is authorized to make this determination. In others, your trustee is authorized 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.
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.
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, 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.
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.
Legal editor: Tim McNeil, January 2016