Part of planning for the stability and continuance of your assets and family includes making provision for the future through the use of wills, trusts and powers of attorney. The Estate Planning Division of Hale Carlson Baumgartner, PLC has had extensive experience in determining when a trust will best help your planning needs. Trusts can be complex documents, and a basic understanding of the terminology of a trust is helpful in understanding the recommendations that are made by Hale Carlson Baumgartner, PLC.
What is a Trust?
A trust is a legal agreement created by one person (the "settlor"; also referred to as a "grantor") with another person or entity who serves as trustee. The trustee can be the settlor in which case the trust is often referred to as a "Declaration of Trust". The trustee holds "legal title" to the trust property, typically for the benefit of the settlor during the settlor's life and for the settlor's intended beneficiaries following the settlor's death. The duties, powers, rights, and responsibilities of the trustee (as the manager) are addressed in the trust agreement.
There are many different types of trusts and there is no common "boilerplate" trust agreement in use. The trust can be established and effective during one's lifetime (a "living trust") or become effective upon their death as part of their last will and testament (a "testamentary trust"). A living trust can be irrevocable or revocable. If irrevocable, the living trust cannot be unilaterally modified or revoked by the Settlor. Irrevocable living trusts are often used for gift tax planning where a donor is not comfortable with giving the donee control of the property often because of the donee's age or financial maturity.
The most common type of trust (often referred to as a "living trust" - even though technically a living trust can be irrevocable) is a revocable trust. Most of our clients serve as both the settlor and as the initial trustee. Sometimes our clients have their spouses serve as a co-trustee. Because the living trust is a "revocable trust", the settlor can change the trust terms or revoke the trust during the settlor's lifetime by executing a written amendment provided they are competent at the time of the amendment. In other words, a revocable trust is subject to amendment or modification and the settlor retains the power to unilaterally revoke the trust and reacquire its assets. Because of its flexibility, a revocable living trust has proven to be the most popular format. Upon the settlor's death, the living trust becomes irrevocable.
The living trust is generally considered a stronger alternative to a durable power of attorney. Upon the settlor's death or incapacity, a successor trustee can step in to serve and the trust agreement directs the successor trustee as to the continued administration and distribution, or further retention of the trust assets. Some trusts can last a very long time (so called "dynasty trusts") which can pass from generation to generation and may insulate those family members' trust interests from transfer taxes and creditor claims.
What are the benefits of a "Living Trust"?
1. Management of the Settlor's property. The trust can provide for current management of funds and also future management, particularly in the event of disability or death, as well serve as a central repository for assets in a reasonably secure format.
2. Avoiding probate and multiple probates in various jurisdictions. Although this is another commonly suggested reason, restraint should be used in viewing a funded revocable trust simply as a "will substitute". Our experience shows us that rarely are all of the settlor's assets placed in or transferred to the trust and, therefore, a "pour-over will" should be used in conjunction with the trust funding the bulk, if not all, of the "probate" assets to the trust upon death. The assets that are in the trust at the time of death, however, avoid probate tax (around $1.30 per thousand), probate court supervision and also avoid the necessity of annual accountings with the Commissioner of Accounts pursuant to Virginia rules. Moreover, appointment of additional or successor trustees are also handled expeditiously and economically (i.e. without the need for a court petition, appearances and orders). Also for real property which is out-of-state, a trust can avoid an out-of-state or "ancillary" administration of that real estate. Additional flexibly can be built into the trust administration which is not available or difficult in terms of structuring in a will. A trust is particularly desirable for assets which do not require probate administration because of their highly passive character.
3. Will contest. Revocable trusts can be used to avoid a will contest. While the trust is not legally any less susceptible to challenge, as a practical matter, contests can be more difficult for a variety of reasons.
4. Publicity. Wills and accountings of assets are recorded among public documents after death and, therefore, become public knowledge. This may be of particular concern to avoid minor beneficiaries falling prey to suitors or "friends" with improper motives who gain knowledge of their potential, expectant wealth as a matter of a public record.
5. Choice of a situs. Situs is the Latin term for the location or position of something for legal purposes. A revocable trust can be used to allow settlors to select the situs of administration and disposition of their assets -- a benefit not otherwise enjoyed with property that is disposed of by a will. As long as a connection can be set up to claim a particular state as a trust situs, this advantage may be of interest to you, particularly if you wish a state law other than Virginia to govern your trust property or you plan on moving your residence to another state.
6. Improving the estate's liquidity. Some commentators have opined that a revocable trust better provides for prompt estate liquidity following death versus assets "tied up" in probate. As a practical matter, we have found that assets can be made readily available in Virginia through probate even if litigation is commenced and that executors and administrators still face difficult decisions in trying to satisfy competing creditors without following statutory formalities.
7. Powers-of-attorney. A trust is a stronger tool than a power-of-attorney as stated previously. In fact, brokerage houses and banks particularly prefer a trust over a durable power-of-attorney.
What are the disadvantages of a "Living Trust'?
1. Expense. Generally, the creation and funding the revocable trust is more expensive and time-consuming than a testamentary trust due to additional documentation. For some, the re-titling of assets and the subsequent title holding requirements can become more burdensome than it is worth; however, this work removes much of the effort otherwise required by an executor after death.
2. Statutory Structure. Before 2006, the Virginia Code had a more definitive statutory framework in favor of wills (including various saving provisions particularly regarding estate and fiduciary income taxes). There are still more safeguards offered through the probate process which are not wholly applicable to living trusts. Virginia adopted its version of the Uniform Trust Code (the "UTC") effective July 1, 2006. Although the Virginia UTC has changed this uncertainty to a large extent, it is a relatively new statute and still leaves some degree of uncertainty.
3. Beneficiary Protection. The probate process offers some degree of oversight, although breaches of the fiduciary's obligations are typically not spotted until months and sometimes years after they occur. Moreover, one of the most important protections offered (surety or security) is generally waived by persons in their wills. Accordingly, the protections are often illusory if you are dealing with an "untrustworthy" fiduciary unless you require surety.
