1. There are many types of Trusts.
A. An Inter vivos (meaning during life) Family Trust is a trust created during your lifetime. The "grantor" (also called the "settlor," "trustor" or "donor") is the person who sets up the trust (you).
B. A Revocable Family Trust is an inter vivos trust in which the you, (the grantor), retain the power to amend (change or modify) or revoke the trust. A revocable trust is usually set up for the benefit of the grantor, the grantor's spouse, children and grandchildren. It is set up when the grantor and the trustee(s) sign the trust agreement (which is sometimes referred to as a "deed of trust," "trust indenture" or "trust instrument") and the grantor funds the trust, with some or all of the grantor's assets. The trust is not valid until assets are transferred to the trust which is called "funding" the trust. (Note that under some state statutes certain trusts, such as those receiving life insurance proceeds at the grantor's death, are valid even if unfunded.) You, (the grantor) retain complete and unrestricted control of the assets of the revocable trust and that is why the assets in a revocable trust are not protected from nursing home costs.
C. An Irrevocable Trust is an inter vivos trust that cannot be revoked, amended or terminated by you (the grantor) alone. That is why assets transferred to the Irrevocable Trust, like your home, are protected from nursing home costs. It is usually established by the grantor for the benefit of the grantor's spouse, children and grandchildren.
There are two very important facts you should be aware of with regard to Irrevocable Trusts:
One, New York law (EPTL Sec. 7-1.9) allows an Irrevocable Trust to be amended if you and the beneficiaries of the trust (your children) agree to the amendment. If you have a good relationship with your children this gives you complete flexibility, even though the trust is "Irrevocable."
Second, while you, (the grantor) cannot revoke, amend or terminate the Irrevocable Trust by yourself, as a practical matter, you can still retain tremendous control to completely eliminate any beneficiary of the Irrevocable Trust or increase or reduce their share, solely in your discretion through the use of a "Limited Power of Appointment" even if you or your children don't agree. Please refer to my companion article on this website for an explanation of the use of an Irrevocable Family Trust in estate planning.
2. Why Use A Revocable Trust in Estate Planning?
A. One benefit of a revocable trust is that it provides management of property during your lifetime. Seniors who become physically or mentally unable to handle their own affairs may need help to manage their assets during their lifetime.
B. The most important benefit of a Revocable Trust is that at the time of your death, it avoids the expense, legal complications and delay of probate. There are simply no legal fees, costs or expenses for probate with regard to the assets in the revocable trust and your children are free to distribute your assets after your passing in a timely manner without losing any percentage or part of your estate to the legal fees, costs or expenses of probate.
Probate can be expensive, time consuming, and frustrating because probate may result in years of delay to settle the estate. Probate is often expensive for the surviving spouse and children, often resulting in less money being distributed to your beneficiaries because of attorney’s fees and expenses inherent in probate. Assets in the trust are administered by the Trustee(s). This saves probate-related costs such as legal fees and guardian fees for minor children or beneficiaries with special needs.
C. A child, friend or family member may serve as a trustee or co-trustee with the grantor, thus providing financial management of the grantor’s assets in the event of the grantor’s physical (heart attack or stroke for example) or mental disability, (Alzheimer’s, dementia, senility).
D. You may decide that it is necessary for a professional, experienced trustee to become involved to serve as sole trustee or as a co-trustee with a child, friend or family member, which would provide the grantor:
i. financial and investment advice
ii. safekeeping and custody of assets
iii. record keeping and
iv. tax advice.
<> The trust can be an “Unfunded Revocable Trust." A person who is presently able to manage his or her own assets may create an unfunded revocable trust, which is one that has some small asset, such as $10 at the time of creation. If the grantor later becomes disabled, incompetent, or dies, assets are transferred to the trustee for management. When the grantor doesn’t fund the trust when it’s created, the assets must be transferred at a later date to the trustee by a durable power of attorney or by a pour over will. It should be noted that I do not advise the use of unfunded revocable trusts in my practice because of the possibility that the grantor will die before funding the trust, thus leaving a large amount of assets that must pass through probate, which defeats one of the main reason for establishing the revocable trust, avoiding the delay, legal fees, costs and expenses of probate. Many firms advise not funding the revocable trust when its set up or fail to help the client make sure the trust is funded, but that results in your having to go through probate and that makes no sense to me. My opinion is to fund the revocable trust if you set one up.
<> "Funded Revocable Trust." Unlike the unfunded revocable trust, with a funded revocable trust, the trust is funded with most, if not all of the grantor’s assets and the grantor usually names himself or herself as a co-trustee with their spouse, child or friend can manage the assets according to the grantor’s wishes and directions without the interference of any court, the associated legal fees and without the necessity of a legal guardianship or probate. It should be noted that in some states like New York, the grantor can be the sole trustee, but in other states there must be a co-trustee. I always advise my clients to have a co-trustee to avoid any delays in distributing assets from the trust if the grantor is disabled or passes away.
<> Using a funded revocable trust also reduces the risk of a will contest involving the grantor’s incompetency or undue influence upon grantor because the unhappy heir must initiate court action (rather than merely filing objections to the will as in the will contest procedure).
<> A revocable trust assures the grantor privacy because unlike a will, it is not a public document and doesn’t have to be filed in Surrogate’s Court, unless the will pours into it. If the will pours into the revocable trust, the trust will be part of the public record in New York.
<> A revocable trust is extremely useful in avoiding expensive ancillary probate ( a second probate in another state besides the state where the grantor lived) which will be necessary if the grantor owned assets in their individual name like a vacation home located outside the state where the grantor lived.
<> With a revocable trust, assets are available for immediate distribution after death.
<> A revocable trust permits the grantor to determine what laws will govern the administration of the trust and thus what state will govern administration of the assets.
I hope this short article helps somewhat in taking the mystery out of revocable trusts.
I offer a free office conference to further explain how a Revocable Family Trust can be used to help you achieve your estate planning goals.
Warmest personal regards,
D. Victor Pellegrino
Elder Law, Trust and Estate and Tax Sections of the New York State Bar Association
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