by Steve Goodman
CPA, MBA – President & Chief Executive Officer
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Family Revocable Trusts
Family Trust describes a trust (sometimes called a Deed of Trust or Trust Deed) in which the beneficiaries are all related by blood, marriage, or adoption. The Family Trust can be revocable or irrevocable, though the revocable version is more common. This article will focus on revocable living trust as the key element of a package of family trust documents. It is strongly recommended that the pour-over will, and medical directive and power of attorney be completed as a package.
How a Revocable Living Trust works
A revocable living trust is a legally binding document that retains ownership of property and financial assets titled in the name of the trust. The person setting up the trust has total control over the trust assets while living. An appointed successor trustee assumes the authority to settle the estate upon the death of the owner.
There are three key parties to a trust.
- The Grantor or Settlor is the person(s) establishing trust.
- The Trustee is the person(s) who manages the trust. In the case of a living trust, the initial trustee is often the grantor. When the grantor dies or becomes incapacitated, a successor trustee assumes authority. A bank or trust management service can serve as a trustee.
- The Beneficiaries are those who benefit from the trust. In the case of a family trust, the beneficiaries typically include a spouse, children, grandchildren, and other relatives. The grantor can also be a beneficiary.
Trust agreement documents can be complex given that they may include numerous contingencies. It is possible to use an online service to create the trust document, though an attorney is recommended. Trust regulations may differ by state. Without a full understanding of state-specific clauses and restrictions, one runs the risk of legal concerns following one’s death or incapacitation.
Once created, the trust document is notarized and then the grantor/trustee can apply for a tax ID from the IRS. The tax ID allows the trust to establish a checking account at a bank.
The next step seems obvious, yet many estate planning attorneys report that failure to complete the next step in the process is not unusual. Assets must be titled to the trust to be covered by the trust. Houses, bank accounts, brokerage accounts, insurance policies, cars, boats, airplanes, and business ownerships require retitling to make the trust the owner. Failure to retitle does not permit the trust to fully serve the purpose for which it is intended.
Why Establish a Family Trust?
The reasons to establish a family trust include the following:
- Unlike a power of attorney, every state will recognize a trust.
- If the original trustee dies or becomes incapacitated, the trust provides clear instructions concerning who the successor trustee will be or how he/she is to be selected.
- All banks and brokerage firms will recognize and honor trust. Some banks and brokerage firms have shown a propensity to challenge powers of attorney.
- Assets owned by a trust avoid probate. This guarantees privacy and increases the speed at which the assets can be distributed.
- Multiple real estate assets owned in multiple states require probate in each state if not owned by a trust. By placing those assets in a trust, the beneficiaries are spared considerable legal fees and time.
- Upon death, the successor trustee has immediate access to bank accounts and other assets that can be liquidated if cash is an immediate concern.
- Because these trusts are revocable, if the guarantor is also the trustee, he/she effectively has complete control over the assets.
- Trusts are much harder to contest than a will. Assets in a contested trust are not frozen. They can still be distributed forcing the complainant to file suit against the individual heirs and not the estate.
- Trusts allow the grantor to establish rules for distributions. A will that does not include trusts transfers an asset in a lump sum fashion following probate. A trust allows a grantor to specify that the trustee manages assets for a minor or that benefits be doled out to certain beneficiaries over an extended period of years.
- When accompanied by a pour-over will (highly recommended), the trust’s distribution instructions can include assets not held by the trust upon death. The pour over will instructs the executor of the estate, after probate, to retitle all remaining assets to the trust. This simplifies the distribution process and accounts for all assets not specifically retitled.
Disadvantages to a Family Trust
- Trust documents can be costly to prepare.
- Revocable trusts remain taxable on the grantor’s personal tax return. Assets in a trust can require some additional paperwork.
- 3rd party trustees need to be paid. This results in annual maintenance expenses.
- Retitling assets can incur time and costs. However, some of these expenses will be offset by probate fees not incurred upon death.
- Some banks and other financial firms may impose hurdles for loans and other funding options using trust assets as collateral.
- Beneficiaries may be required to make requests through the trustee. This can lead to interpersonal issues between some beneficiaries and the trustee if a beneficiary believes the trustee is not working for his/her benefit.
- A living trust does nothing to assist an individual to avoid a Medicaid spend down situation. All assets held by the revocable trust are considered personal assets available to be spent on medical care and nursing homes.
A family trust has some downsides but a great many advantages. If one is willing to make the effort to retitle assets or pay someone else to do it, then there are few meaningful reasons to not establish a family trust. Specific needs may dictate that a different trust is preferable over a family trust. One should consult an experienced estate planning attorney before proceeding.
If one intends to include non-family members as beneficiaries, the name of the trust may change, but the mechanics and other details remain the same. It is always a good idea to revise or initiate a pour-over will, medical directive, and medical power of attorney concurrent with a family trust. And just as important as initiating a family trust is keeping it current. It should be reviewed periodically and following every family birth, death, marriage, divorce, or other life-changing events
CPA, MBA – President & Chief Executive Officer
About Steve Goodman
For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.
He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.