Jianming Shen, Esq., & Mingli Chen, Esq.
An inter vivos trust ( i.e. , a “living trust”) is a trust created during the grantor's lifetime. The "grantor" (also called the "settlor," "trustor" or "donor") is the person who establishes the trust. A revocable living trust is an inter vivos trust in which the grantor retains the power to amend or revoke the trust. Typically, a revocable living trust is created for the benefit of the grantor. It becomes a reality when the grantor and trustee sign the trust agreement (also called a "deed of trust," "trust indenture" or "trust instrument") and the grantor funds the trust, either with a token asset or significant assets.
The trust is not valid until it is funded. Under some state statutes, however, certain trusts, such as those receiving life insurance proceeds at the grantor's death, are valid even if unfunded.
EPTL 7-1.16 provides that a lifetime trust shall be irrevocable unless it expressly provides that it is revocable. EPTL 7-1.17 provides for the formalities of execution, amendment and revocation of lifetime trusts.
A revocable living trust is usually freely revocable by the grantor, but can also be conditionally revocable, i.e. , revocable by the grantor only with the consent of the trustee or another person (unless that other person has an interest substantially adverse to the donor, the trust will be considered revocable for gift tax purposes).
There are many reasons for using a revocable living trust as an estate planning device, and understanding the tax and non-tax ramifications will aid one in choosing and utilizing the best trust plan to meet his or her needs and objectives. The principal benefit of a revocable living trust is that it provides management of property during the grantor's
lifetime. Various types of people require current management of their assets, e.g., minors children, and inexperienced children who have just reached majority; infirm senior citizens; corporate executives, entrepreneurs, and professionals who lack time for asset management; and persons who travel extensively, either for pleasure or employment reasons.
A professional, experienced trustee provides the grantor (1) financial and investment advice; (2) safekeeping and custody of assets; (3) record keeping; and (4) tax advice.
A person who is presently able to manage his or her assets may create an unfunded revocable living trust, i.e., one that has a token asset, such as $10, at the time of creation. Upon the grantor's later disability, incompetency or death, assets are transferred to the trustee for management. When funding is postponed, a device is needed to authorize transfer of the assets to the trustee.
N.Y. Gen. Oblig. Law Sec. 5-1501 provides that a principal can expressly state that his or her subsequent disability or incompetency shall not automatically revoke or terminate the authority of an attorney-in-fact.
N.Y. Gen. Oblig. Law Sec. 5-1506 provides that a principal can limit a power of attorney to take effect at a specified future time or at the occurrence of a specified contingency (e.g., incompetency).
A revocable living trust can also serve as a receptacle for assets which pour over from the grantor's estate pursuant to a direction in the will.
This is an alternate arrangement to the unfunded trust. In this plan, the trust is funded with substantial assets.
Any individual, including the grantor, or a bank or trust company may be named as a trustee or co-trustees. Sometimes the grantor names himself or herself as sole trustee so as to retain full control of the assets. Another person or a bank becomes successor trustee upon the grantor's disability or death. Until recently, this arrangement was problematical in New York because when the grantor was the sole trustee and sole income beneficiary there was a merger of the legal and equitable estates, and the grantor/trustee's interest was converted into a legal life estate.
See Restatement (Second) of Trusts Sections 99(5) and 115(5). In 1997 New York amended EPTL 7.1.1 to eliminate the merger doctrine. The statute provides that where the same person is both "the sole trustee and the sole holder of the present beneficial interest, the trust is valid if one or more other persons hold a beneficial interest." Such interest can be vested or contingent, present or future.
B. Disposition of Assets At Death - Avoiding Probate
The revocable living trust is not a will substitute, but can be the key document in one's estate plan, providing uninterrupted management of his or her assets once he or she dies. Generally, it is not desirable to "avoid probate" altogether, because when one dies, not all of his or her assets will be under the trustee's control. Nevertheless, assets in the trust avoid probate because they do not pass under the will, and are administered by the trustee. This can save probate-related costs such as a guardian ad litem's fee, an executor's commission (the savings is offset, to some extent, by the trustee's commission), the Surrogate Court 's "inventory tax" and court appointed appraisers (not requirements in New York ).
Having a funded revocable living trust reduces the risk of a court challenge involving the grantor's incompetency or undue influence because the unhappy heir must initiate court action (rather than filing objections as in the will contest procedure).
Generally, a revocable living trust provides that any individual, corporation, or combination thereof will serve as trustee of the trust. It also provides for successor trustees in case of the death, disability, or resignation of a trustee who is then serving. Thus, it guarantees a succession of persons to administer trust assets as required.
The grantor may serve as the initial trustee of his own revocable living trust while he is physically able. If the grantor becomes incapacitated, the successor trustee automatically steps into his shoes and handles his affairs without interruption or disruption. The trust could give the successor trustee powers that are as broad as desired and could provide the same protection in the event of the settler's incapacity that the durable power of attorney provides.
A revocable living trust assures one's privacy because unlike a will, it is not a public document, unless the will pours into it, in which case it will be part of the public record in New York . This is o ne of the by-products of the revocable living trust is that all assets in the trust are disposed of in accordance with the provisions of the trust and are not subject to the scrutiny of the probate court. Much of the information given to the probate court becomes a matter of public record, so when assets are disposed of in accordance with the provisions of a will and not a revocable living trust, those assets, as well as valuations and dispositive terms, can become widely known throughout the community. The revocable living trust, therefore, provides persons with a measure of privacy not available to probate dispositions.
The revocable living trust may have other advantages as well. First, a revocable living trust may be useful in defeating laws establishing a descendant's forced share. It will c reate psychological barriers against contesting the grantor's dispositive scheme . Second, although it will not defeat a spouse's elective share under New York law (EPTL 5-1.1-A) or under the law of states with statutes similar to New York 's, it will r educe the impact of a spousal election against the estate. Third, while it will not defeat the so-called mortmain statutes that limit gifts to charity ( New York no longer has such a statute), it will help reduce problems created by such statutes .
Questions relating to estate planning and/or investment management can be addressed to CharlesSchwab, SHENLAW's cooperative partner, at 718-670-3864. For creating living trusts, or drafting other estate planning instruments, please contact us at SHENLAW, LLC at 212-488-6888 or 718-888-1006.
A probate administration will 1) prove the will, 2) limit the time for creditors to file claims; and 3) create the estate as a separate taxpayer. (?????: 1 )????; 2 )????????????;? 3 )????????????)