Revocable Living Trusts

Michael Brennan • July 24, 2012

Revocable living trusts are the most commonly used type of trust in estate plans.

As with any estate plan , there is no one-size-fits all solution that can easily be applied to every situation. However, there are a number of tools and techniques that can be used in certain situations which may provide an individual with some desirable benefits. Any discussion of trusts as estate planning tools must include an overview of revocable living ( inter vivos ) trusts. A revocable trust is one that is created during the life of the grantor, and its primary uses are to manage property during the grantor’s life and reduce the cost and time associated with probate upon the grantor’s death while permitting the grantor to retain an amount of control over the assets it holds. Along with the ability to retain control over the assets in a revocable trust, a grantor retains the power to amend or even revoke the trust entirely during his life. While this makes revocable trusts highly desirable for many individuals, without additional planning techniques there are some downsides- namely its inability to save assets from tax and inability to shield assets from creditors upon the grantor’s death.

How it works

As discussed in an earlier post , a revocable trust has three main players: 1) the settlor or grantor (who creates the trust); 2) the trustee (who administers and operates the trust); and 3) the beneficiary or beneficiaries (who receive the benefit of the trust and any distributions the trust makes). The revocable trust is established by a trust agreement, which is a writing that sets forth the above relationships and lays out how the property that the trust holds will be managed and distributed. The trust agreement, which is typically drafted by an estate planning attorney , is then formally executed in a manner that is specifically dictated by state law.

Once the trust agreement is validly created and executed property must actually be transferred to the trust. This is done by specifically titling assets- such as a residence, stocks, bond, or insurance plans- in the name of the trust. For example, with real estate, this is done by executing and recording a deed evidencing transfer of the real estate to the trust.

Assets that are titled in the name of the trust are managed by the trustee in accordance with the terms of the trust. Typically, when the grantor is alive and well he may manage the assets in the trust as the trustee of the trust for his own benefit as the beneficiary. The trust may set forth a replacement trustee who is to take over trustee duties in the event of the incapacity of the grantor. The trust may also set forth how the property is to be distributed upon the death of the grantor. (NOTE: In Wisconsin, a trust is revocable only if it specifically states so in the trust agreement).

The type of arrangement that a revocable living trust provides offers some pros as well as some cons. Here is a high-level view of five of each:

5 benefits of using a revocable living trust:

1) Property management

Perhaps the most beneficial aspect of a revocable living trust is that it provides for the continual management of the property it holds. Initially most revocable living trusts are established so that the grantor is also the trustee. This enables the management of the property that the grantor has legally transferred to the trust to remain a responsibility of the grantor. For example, if the grantor transfers a personal residence to the trust and names himself the trustee, then he may still pay the mortgage, taxes, etc. Even though the trust legally owns the residence, the grantor, as trustee as well as primary beneficiary, may continue to manage the property exactly as he had prior to it being deeded to the trust. The trust may also contain provisions dictating who should manage the property in the event the grantor becomes ill, disabled or otherwise unable to manage the property on his behalf.

2) Avoid probate upon death

Probate is the process of proving to a court that a will is valid and disposing of the items it lists in the manner in which its creator dictates, paying any due taxes, satisfying debts and generally wrapping up the affairs of a deceased person. The process can become lengthy and expensive so a goal of many estate plans is to avoid the process as much as possible. With some estate planning , the probate estate can be kept relatively small in relation to the entire estate. Certain types of assets are not subject to probate proceedings including insurance proceeds, certain jointly held property and those assets that are held in trust. Therefore, a revocable living trust that is properly funded and legally holds title to assets will avoid probate proceedings and the assets it holds will be transferred to the beneficiaries named in the trust agreement without court involvement. Thus, revocable trusts have the potential to deeply cut the time and cost sometimes associated with the probate process.

3) Privacy

This may be less of a true benefit and more of an FYI, but wills must be filed with the court upon an individual’s death while a trust does not. Therefore, a trust’s dispositive scheme, beneficiaries, etc. can remain private while a will’s provisions become public record. For most, it is not of concern who knows what assets are owned at death, however, for the ultra-private this may be a consideration.

4) Planning for mental disability or incapacity

The trust may also contain provisions dictating who should manage the property in the event the grantor becomes ill, disabled or otherwise unable to manage the property on his own behalf. In such a case the trust agreement sets out that a successor trustee can take over those duties on the grantor’s behalf. The alternative if the asset is not owned by a trust is that a guardian or conservator would need to be appointed to accomplish the same goals. This involves additional expense and court involvement which is avoided if a revocable living trust is in place. Additionally, a revocable living trust may contain provisions that name a guardian for minor children in the event of the grantor’s death.

5) Flexibility to amend or revoke the trust entirely

A revocable living trust is amendable or completely revocable during the life of the grantor ( Caution : in some states such as Wisconsin the trust must specifically state that it is revocable). So long as the grantor is mentally competent he can change the terms or the trust, how it should be administered or even who the beneficiaries should be after he dies. This feature of revocable living trusts makes it an extremely flexible estate planning tool.

For example, an elderly couple that is still competent may create a revocable living trust to hold their residence and other assets while they are living. The trust can contain provisions that provide for a successor trustee to take over management of the assets in the event they become incapacitated, permitting them to continue to live in their home without the hassle of managing it or making mortgage payments. Upon their death, the home and any other assets held by the trust pass to the beneficiaries named in the trust agreement and are not subject to probate. As such, a revocable living trust can be used as a contingency planning tool that allows a grantor or grantors to retain independence while also providing for the contingencies of incapacity or death.

Five disadvantages of using a revocable living trust:

1) Won’t avoid income taxes

Since a revocable trust is amendable and revocable, for income tax purposes the IRS considers the grantor as the owner of the assets. This means that any income produced by the trust is taxed to the grantor and any deductions that are permitted by the trust (for example the interest deduction on a mortgage) are taken by the grantor. For income tax purposes it is as if the trust does not exist. For this reason it almost always not an estate planning tool that is used to minimize tax burden.

2) Won’t reduce estate taxes more than other estate planning tools

While estate tax savings are possible with a revocable living trust, there are far better estate planning tools that can be used to minimize tax burden. Generally, a grantor must pay estate taxes on property owned at death above a certain threshold ($5.12 million in 2012). While assets in a revocable trust avoid probate they are still viewed as owned by the grantor at death, and thus, they are subject to estate tax. While it is possible to work tax savings into a revocable living trust, by itself, it is not an effective tax minimizing estate planning tool.

3) Won’t eliminate the need for probate

While the assets held by the revocable living trust are not subject to probate proceedings, the chances that an individual will die without anything that is subject to probate are minimal. Therefore, while a revocable living trust may minimize the assets that must be distributed through probate, it is still a necessary procedure in most cases. Additionally, someone will still have to prepare probate documents, file tax returns and transfer property to named individuals and incur the costs associated with these tasks. However, removing substantial assets from the probate estate can reduce cost and the time it takes for assets to be distributed to friends or loved ones so not all is lost.

4) Won’t shield assets from creditors upon death

Similar to the reasons it is inadvisable to use a revocable living trust to reduce taxes, it is not the ideal tool to shelter assets from creditors. Since a grantor for all intents and purposes is considered the owner of the assets the trust holds due to the ability to amend, revoke or otherwise direct how they should be managed and disposed of, creditors can still reach the assets as if a trust did not exists at all. Therefore, revocable living trusts should not be used if a primary purpose of an estate plan is to shield assets from creditors.

5) Won’t eliminate the need for a will or other estate planning documents

Any grantor who is thinking about adding a revocable living trust to his estate plan should also have a pour-over will which can effectively dispose of property that is not included in the trust upon death. It is also possible that property will be received after death but before the estate is wound up. A will can direct what is to be done in this situation. Additionally, it is wise to have other documents that do not directly affect property rights drawn up to round out an estate plan including powers of attorney for finances and healthcare and a living will.

While a revocable living trust offers benefits as an estate planning tool some goals are best accomplished through other means. An estate planning attorney can discuss the revocable living trust option in much more depth along with other possible tools to accomplish your estate planning goals. There is no one-size-fits-all solution to estate planning and the advice of an attorney is imperative to ensuring that your wishes are followed. For more information on revocable trusts and other estate planning tools feel free to contact me an attorney admitted in your state that is competent to give legal advice specific to your situation.

Michael F. Brennan runs a virtual law office helping clients in Illinois, Wisconsin, and Minnesota with estate planning and business law issues. He can be reached at michael.brennan@mfblegal.com with questions or comments, or check out his website at www.thevirtualattorney.com

The information contained herein is intended for informational purposes only and is not legal advice, nor is it intended to create an attorney-client relationship. For specific legal advice regarding a specific legal issue please contact me or another attorney for assistance.

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By Michael Brennan • September 9, 2021

Illinois Just Made It Easier Than Ever to Make a Power of Attorney

By Michael Brennan • September 2, 2021

A power of attorney for health care enables an individual to appoint a trusted agent to make medical decisions on his or her behalf if the individual is unable or unwilling to do so for themselves. For example, if a situation arises where you are in an accident and need emergency medical care, doctors will look to a trusted individual to make decisions on your behalf. Typically, this is family members, and technically, most state laws set an order of precedence on who doctors should turn to in the absence of any specific (and legally binding) instructions from the patient. However, the most ideal situation is one in which doctors rely on the instructions the patient has detailed in a valid power of attorney. Powers of attorney for health care do not have many specific requirements for validity. But, they do need to be signed by the patient and at least one witness (this varies by state). Often, someone may decide that they need a health care power of attorney in a pinch. For example, an older parent may be going in for surgery and want to cover their bases if something goes wrong. They may decide the day of the surgery that they would like to name an adult child as their health care decision-maker if something happens, so that child cannot serve as the witness. Typically, an estate planning attorney could witness the document, but that may mean scrambling at the last minute for an appointment or coordinating a meeting quickly on the way to the hospital. Not ideal. Now, however, Illinois has amended the Illinois Power of Attorney Act to permit electronic signatures. The Act states that: “The signature and execution requirements set forth in this Article are satisfied by: (i) written signatures or initials; or (ii) electronic signatures or computer-generated signature codes .” The Illinois Electronic Wills and Remote Witnesses Act permits those witnesses not only to sign electronically, but also to sign remotely. So, instead of a mad last-minute scramble to sign and witness an 11th hour power of attorney, one can be e-signed online through video conferencing with the principal and estate planning attorney quickly linking up on zoom from the comfort of their home, office, or even the hospital bed, with much more simplicity and convenience. The Power of Attorney Act was further amended to permit powers of attorney for health care to be in electronic format. So, it is no longer a requirement to dig the paper hard copy out of the basement filing cabinet and remember to bring it to the hospital. Instead, an electronic copy can simply be sent to the hospital through its patient portal, once that functionality is set up by the health care provider at least. The power of attorney can now easily form a seamless part of a health care record, neatly kept in an electronic medical file. The pandemic of 2020-2021 forced institutions to make things more efficient and reflective of the technologically-centric world we now live in. That is not more evident in many places as it is the area of law. And, few practicing attorneys would tell you that’s a bad thing.

Illinois Electronic Wills and Remote Witnesses Act Enacted

By Michael Brennan • August 5, 2021

On June 26, 2021, Illinois adopted the Electronic Wills and Remote Witnesses Act. Plainly, the Act is a generational game changer for estate planning. Gone are the days of scheduling a formal office appointment with your attorney to sign estate planning documents as the law office staff witnesses and notarizes those documents on the spot.

Illinois' Electronic Wills and Remote Witnesses Act is a Game Changer

By Michael Brennan • July 30, 2021

Preparing a last will and testament has always required the inclusion of original signatures of both the person making the will and witnesses. Understandably, coordinating the signing of the will could pose some administrative challenges, especially for small law firms and solo practitioners—not to mention the many people who elect to draft a will without an attorney’s help—who may not have a crowded office full of willing witnesses. Along with wills, estate plans typically include powers of attorney for finances and health care decision making as well. Those documents also require original signatures from their creators, witnesses, and notaries. Predictably, COVID-19 and the resulting government shutdowns of businesses and encouragement of social distancing and remote work complicated the task of signing and witnessing these important estate documents (Notaries are also now permitted to act remotely under a separate but related piece of legislation). Luckily, in many states, temporary orders permitted the remote execution of many documents, and a framework for conducting remote document signings began to take form. On June 26, 2021, Illinois adopted the Electronic Wills and Remote Witnesses Act. Plainly, the Act is a generational game changer for estate planning. Gone are the days of scheduling a formal office appointment with your attorney to sign estate planning documents as the law office staff witnesses and notarizes those documents on the spot. Now, under the EWRWA, the need for the conference table signing is gone. Wills, powers or attorney, and other important estate documents can be validly signed and witnessed remotely through audio-video communications. More so, “electronic wills”—those not physically printed on paper—are now an acceptable form of will in Illinois that can be probated just as paper wills have for decades. Some of the highlights of the new law are below. Electronic Copies of wills are now valid. Electronic Wills are now an option. The new law defines an electronic will as simply “a will that is created and maintained as a tamper-evident electronic record.” What is “tamper-evident” exactly? Well, the statute defines it as a “feature of an electronic record by which any change to the electronic record is displayed.” So, popular document signature software like Docusign and Hellosign would do the trick. Individuals and Witnesses can now sign on multiple signature pages with one master document being compiled later on. If a platform like Docusign is not used to create and sign an electronic will, there is now an option to use multiple signature pages for the testator and witnesses. In practice, this enables a testator to sign a will while the witnesses watch over audio-video means, like Zoom. They can then each sign the signature page sitting with them at their physical location. The testator and witnesses can then send the originals to a central location (likely the estate planning attorney) to be compiled into one master document. Previously, this was impermissible, as the document would have had to have been signed in the conscious presence of each other. The Electronic Wills and Remote Witnesses Act redefines “presence” to expressly include, “being in a different physical location from another person, but able, using audio-video communication, to know the person is signing a document in real time.” Witnesses can witness signings (and sign) remotely through video-conferencing. As mentioned, witnesses to a will previously had to be physically present with the testator. Under the new law, witnesses can now be remote. If an electronic will is prepared for signatures, the witnesses can simply sign the electronic will after watching the testator sign. If a paper copy is being used, then the witnesses can watch the testator sign his or her own paper copy, and then sign a separate signature page in their remote location. For paper copies, the witnesses and testator must physically compile all the signature pages within 10 days. The person appointed by the testator to compile all the signature pages must state that the signature pages were attached within 10 business days of signing and that the pages were attached to the testator’s complete and correct will for the will t be admitted to probate. So, best practice is to attach those statements to the will at the time of its signing or the time at which the master document is compiled. Wills can be signed electronically. Electronic signatures have previously not been permissible forms of signing a will. Now, however, the new Act changes everything. Testators and witnesses alike can not e-sign wills. To do so validly, the will must designate Illinois as the state of its execution, be signed by the testator or by some person at the testator’s direction and in their presence, and be attested to in the presence of the testator by two or more credible witnesses who are located in the United States at the time of execution. The change of the “presence” requirement is revolutionary, as “presence” now includes being in a different physical location from another person, but able to know the person is signing a document in real time using audio-video communication. Additional Documents, like Powers of Attorney can now be signed virtually Wills are not the only estate planning documents that require witness signatures. Powers of attorney and living wills are just as essential to creating a comprehensive estate plan. Illinois’ Electronic Wills and Remote Witnesses Act also authorizes the witnessing of any document other than a will using audio-video communication. The signatures of the principal and witnesses may be on the same or different pages provided the master document is compiled within 10 business days. While COVID-19 forced the legal industry to adjust, it appears that some of those adjustments were just what was needed to bring estate planning into the 21st century.

Revocable Living Trusts