Baldwin County Estate Planning Attorney – Revocable Living Trust

What is a Revocable Living Trust?

A revocable living trust provides an alternative method to distribute an estate. The use of a trust may avoid the need for probate and, if necessary, allow the means to exercise additional control over estate property after death. The most common method of leaving an estate to heirs is through a last will and testament. The will must be admitted to probate court, and an executor is appointed to complete the property transfer according to the instructions of the will. A trust sidesteps the probate court because it continues beyond the death of the person making the trust, the settlor.

Rather than terminating on the death of the person making the trust, the instructions of the trust will designate another trustee to take over the trust and to carry out the trust instructions. Where an executor named in a will has no authority until they are officially recognized by the probate court, the trustee receives authority over the property by virtue of their appointment as the trustee under the trust document.

What Are the Basic Elements of a Trust?

To create a trust, there must be an intention to create a trust, a trustee and beneficiary and some property that is subject to the trust. The person creating the trust is known as the settlor or the trust maker. The property of the trust is sometimes referred to as the corpus or res of the trust. The settlor places the property into the care of the trustee to hold and distribute the property according to the terms of the trust created by the settlor. The beneficiaries are the persons entitled to receive the income or principal of the trust.

Let’s use a simple scenario to demonstrate the different roles. Jane owns a beachfront rental condominium. Jane has two children, Jacob and Emily. Jane creates a revocable living trust for her beachfront rental condominium and appoints her financial advisor, Michael as the trustee of her revocable living trust. According to the terms of the trust, Michael holds the property in trust. Michael rents out the property, and according to the instructions of the trust, he pays the rental income (after expenses) equally to Jacob and Emily for ten years.  At the end of the ten years, per the instructions of the trust, Michael distributes beachfront rental condominium to Jacob and Emily. The distribution of the beachfront rental condominium to Jacob and Emily ends the trust.

In this example, Jane is the person creating the trust, the settlor or trustmaker. Michael is the trustee. Michael does not own the beachfront rental condominium, but he has authority over it within the boundaries of the trust instructions. Michael holds the condominium as a fiduciary. Jacob and Emily are the beneficiaries of the trust. During the life of the trust, the 10-year period they receive the income from the rentals, they have no authority over the beachfront rental condominium. They are only entitled to receive the income. During the life of the trust, Jacob and Emily cannot transfer the beachfront rental condominium. At the end of the trust, after Michael distributes the beachfront rental condominium to Jacob and Emily, they own the beachfront rental condominium free of trust. They can sell it, lease it, hold it, etc.

In the estate planning context, that trust would be slightly altered to meet Jane’s estate planning goals of ensuring an income stream for her children 10 years beyond her death and restricting their authority to sell the beachfront rental condominium. Using the same example from above, the trust is changed slightly to provide that Jane will remain as the trustee until her death. On Jane’s death, Michael will take over as the trustee with the same instructions to pay the income from the beachfront rental condominium to Jacob and Emily for 10 years. Michael will distribute the beachfront rental condominium to Jacob and Emily free of trust, 10 years after Jane’s death.

By setting up this trust, Jane ensured that her children would have a stream of income to help with their support for 10 years after her death. To alleviate Jane’s concerns that her children might squander their inheritance, Jane’s trust also restricted her children from selling the beachfront rental condominium for 10 years after her death.

What does a Trustee do?

The trustee performs the instructions of the trust as a fiduciary. The typical trust instructs the trustee to hold property, invest it, exercise discretion to make distributions to the beneficiaries during the life of the trust, and, finally, distribute the remaining property to specific individuals or a class of individuals at the end of the trust. As a fiduciary, the trustee is required to act in good faith and in accordance with the terms and purposes of the trust and the interest of the beneficiaries.

Who can be a Trustee?

The trustee can be an individual or company. Most people choose a family member, a trusted advisor such as a financial advisor, accountant or attorney, or a financial institution with whom they have experience. The person selecting the trust can also elect to designate multiple persons to serve as co-trustees working in separate functions or all working together the fill the trustee role. The trustee should be someone who can be trusted to carry out the instructions of the trust and who is capable of carrying out the instructions of the trust.

What is a Living Trust?

A living trust is a common term typically used in place of the legal term art “inter vivos,” a latin term describing a trust made during the life of the settlor. The revocable living trust commonly used for estate planning is created and funded during the life of the person making the trust as opposed to a testamentary trust created by the terms of a will.

What is a Revocable Trust?

A revocable trust remains open to revocation and amendment by the person creating the trust.  If the trust is revocable, the person creating the trust may also retain the authority to continue to move property in and out of the trust. For estate planning, revocable trusts are used more often because the trust can be modified, and property can be moved in and out of the trust during the lifetime of the person creating the trust. A good analogy for a revocable trust is an open box. While the box is open, property can be moved in and out of the box, including the possibility of removing all of the property out of the box. If the revocable trust later becomes irrevocable, the box closes.

What is an Irrevocable Trust?

In contrast to a revocable trust, an irrevocable trust is a trust that does not remain open to amendment or revocation by individual action of the person creating the trust. A trust can start out as an irrevocable trust or become irrevocable on the happening of some event, most commonly the death of the person creating the trust.

The Law Office of Brenton C. McWilliams is an Estate Planning, Elder Law and Probate Law Firm serving clients in Baldwin County including our local cities of Orange Beach, Gulf Shores, Foley, Elberta, Summerdale and Robertsdale. For your convenience, we have offices in Orange Beach and Foley. For a consultation please call (251) 215-9275 or request a consultation on the consult request page.