The most common type of trust for estate planning is a “revocable trust”, also known as a “living trust” and sometimes called a “revocable living trust”.
A trust is a legal document, normally called a trust agreement, that is used to hold, manage, and distribute your money and property for your benefit (if you are incapacitated) and your beneficiaries (after you die).
What are the different types of trusts?
There are generally three types of trust:
- Revocable trust,
- Irrevocable trust, and
- Joint trust.
“Revocable” means that you can change (amend or restate) or cancel (revoke) the trust anytime during your lifetime.
“Amend” means that you change one or more parts of the trust but most of the trust remain the same. This is often done to name a new Trustee or change a beneficiary.
“Restate” means that you replace your existing trust with a completely new version. This is commonly done if it has been a number of years since your trust was first prepared and there have been numerous changes in the law since that date.
“Irrevocable” means you can’t make changes to the trust after it is signed. A revocable trust becomes irrevocable and generally can’t be changed after your death or if you become incapacitated.
A “joint trust” is a single document for a married couple in which both spouses combine their money and property in a single revocable trust. Normally, a joint trust does not become irrevocable until the death of the last spouse to die.
What’s included in a Trust?
As the creator of the trust you are known as the grantor, sometimes also called the settlor or trustor.
A trust names your Trustee and must specifically name the beneficiary of your money and property.
The Trustee is the person or financial institution (commonly known as a corporate trustee) who will be responsible for managing your money and property for your beneficiary. A Successor Trustee is often named in case your first named Trustee is unable (or unwilling) to serve.
The beneficiary is the person or persons who receive your money or property from the trust. You can name as many beneficiaries as you like and provide for them in the same or different ways.
If you become incapacitated, the Trustee will hold, manage, and distribute the trust property for your benefit, similar to your agent under your financial durable power of attorney.
What happens if I don’t have a Revocable Trust?
If you don’t have a trust:
- Upon your death, your money and property will be distributed as spelled out in the beneficiary, transfer-on-death or pay-on-death forms you have completed. Property and accounts that do not have such a form will be distributed under the terms of your Will (if you have one), otherwise, as provided under state law by the probate court.
- If you are incapacitated, your agent under your financial durable power of attorney will hold, manage and distribute your money and property for your benefit. If you don’t have a financial durable power of attorney, a conservator will be appointed by the court.
Who should I name as my Trustee?
Your Trustee is a fiduciary. As a fiduciary, they must act in the best interest of and manage your money and property for the benefit of your beneficiaries.
A fiduciary must be trustworthy, honest and act in good faith. There are four basic duties of a fiduciary. Your Trustee must:
- Act only in the best interest of your beneficiaries and avoid self-dealing and conflicts of interest.
- Collect and manage the trust property carefully.
- Keep trust property separate from theirs.
- Keep good records.
While you are alive, you normally serve as Trustee. If you are married, it is common for your spouse to serve as your Co-Trustee or Successor Trustee.
A Co-Trustee means that two or more Trustees are serving together at the same time.
As to your Successor Trustee, it is best if it is somebody who is experienced with handling financial matters. It is common for the agent named under your financial durable power of attorney and/or the executor under your Will to also be named as your Successor Trustee.
Does a Revocable Trust avoid probate?
Yes. One of the primary advantages of a Trust over a Will is that the terms and conditions of the Trust are private and distribution of the trust property does not require approval of the probate court.
What do I put in my Revocable Trust?
For a trust to be effective it must be “funded”.
Funded means that your money and property has been retitled in the name of the Trust (such as your house and autos) or the Trust is the named beneficiary on your property titles and beneficiary, transfer-on-death or pay-on-death forms (such as your retirement accounts and life insurance).
Normally, all your property and accounts would be titled in the name of the Trust. In addition, the Trust would be named the primary beneficiary on all your beneficiary, transfer-on-death or pay-on-death forms.
How do I designate property to be held in my Revocable Trust?
There are generally two ways to designate property to be held in your Trust:
- For property with a title (home, autos, etc), you name the current Trustee:
[Trustee Name], trustee under the
[Your Name] Revocable Trust U/T/A dated [Date Signed]
- For property that will pass under a beneficiary, transfer-on-death or pay-on-death form (retirement account, life insurance, etc):
Successor Trustee under the
[Your Name] Revocable Trust U/T/A dated [Date Signed]
The reason for the difference is that we know today who is currently serving as Trustee when we transfer titled property but we don’t know for sure which of your named Trustees and Successor Trustees will be serving when property passes under a beneficiary, transfer-on-death or pay-on-death form at your death.
“U/T/A” is an abbreviation for “under trust agreement”. “U/A” for “under agreement” is also used.