Trusts, like corporations, partnerships, and limited liability companies exist because societies and laws say they should exist and be recognized. One of principle advantages of Trusts is that they can survive the death of the creator of the Trust without the need for court supervision, usually referred to as “probate”; often a cumbersome costly process. Trusts are a beneficial fiction essential to estate planning and here is how they work? All Trusts have at least three parts: (1) You the Grantor — the creator, (2) a Trustee that performs the necessary work (also called fiduciary duties), and (3) the Beneficiaries who receives cash and benefits from the Trust.
A Trust created while the Grantor is alive is called a Living or Inter Vivos (Latin for Living) Trust. Trusts can also be created in Wills. These types of Trusts (in Wills) are called Testamentary Trust; which require court supervision and reporting, at least annually. While Testamentary Trust are permissible, some of the drawbacks are annual reporting, usually for as long as the beneficiaries (spouse, children, and family) are living.
Assuming you adopt a Revocable Living Trust (RLT), when do you want it to help you and your family; now or at your death? RLTs go into effect when signed, thus RLTs can help you and your family immediately in the event of your disability. Conversely, Testamentary Trusts do not “kick in” until death because Wills are not in effect until the maker of the Will dies. This “effective at death” aspect of Wills and Trusts in Wills, means Trusts in Wills cannot be funded during life, and the assets that eventually go into the Testamentary Trust must first go through probate.
There is another glaring weakness of Testamentary Trusts in Wills. What is the most likely thing to happen to an elderly person before death? Incapacity. Living trusts, effective when signed, can immediately benefit you and your family in the event of your disability. Alternatively, Trust provisions in a Will are of no help and cannot be activated until the death of the Will maker, you. While it would be unreasonable to categorically condemn Testamentary Trusts, they have substantial limitations.
As the name implies, Revocable Living Trusts are created during life and are changeable or revocable. Most importantly, they can be funded during life and become effective immediately. The ability of Living Trusts to act now, rather than at death, creates many practical advantages. If the maker is incapacitated, elderly, or simply wants to turn management over to a younger generation or spouse the Grantor can do so at any time.
Do you want to “run the show and perform all of the parts while you are able to do so? Often the Maker-Grantor (creator of the RLT) performs (but is not required to perform) all three of the roles (Grantor, Trustee, and Beneficiary) while he or she is capable. Because most Revocable Living Trusts are designed to avoid probate and reduce estate taxes (in larger estates), these objectives can be met if the Grantor remains Trustee and Beneficiary until death. Moreover, most Grantors want to control the RLT assets and trust income while they are of sound mind and body. After the death of the Grantor, obviously the Grantor can’t be the Trustee, nor should the estate of the Grantor be a beneficiary of the Trust. This is when Successor Trustees and Beneficiaries come into the picture.
Who should take over when a Grantor dies or becomes disabled? Often it is the surviving spouse, or surviving spouse and an adult child. Or it could be two or more adult children, a family friend, a trust company, and a trust company in combination with a family member, are some of the choices. The choice of successors is not endless, but they are broad and here are some caveats concerning successor trustees.
While the surviving spouse, alone, can be the sole successor Trustee, such a choice is often impractical because the surviving spouse is usually close in age to the Grantor and may be losing some abilities. For this reason, having an adult child or a trust company involved seems to make sense. What about a trust company as the sole successor trustee? Good or bad choice? A trust company serving by itself is questionable. Why? With the advent of megabanks, and their centralized trust departments, often nowhere near the family of the Grantor, communications and continuity with such distant corporate trustees can be stressful. It is therefore usually advisable to have a family member serve as a Co-Trustee with the trust company.