This month I want to introduce you to the Revocable Living Trust which is also known as a Revocable Trust, Living Trust, or Inter Vivos Trust. A Revocable Living Trust is a document which is used to manage one’s property during life and to distribute one’s property at the time of death. The person who creates the Trust is referred to as the trustor, grantor or settlor. The person who holds the property and who is in charge of the management of the Trust is the trustee. The individuals and entities which receive distributions from the Trust are the beneficiaries. The property which is transferred to the trust is called the trust principal, corpus or res. The document is “revocable” and as such, can be amended or terminated anytime during a person’s life, as long as the person has the capacity to do such.
The Revocable Living Trust is generally used to avoid the probate of a Will. It is widely used when a person owns out of state real estate to avoid multiple probate administrations. The document is also useful in situations where an elderly person does not have any family members to handle the day to day finances. In such cases, the Trust can be drafted to instruct the trustee to take care of the trustor during his or her lifetime, and on the death of the trustor, the Trust will set forth the final distribution of the Trust assets.
The trustee of the Revocable Living Trust can be either an individual or a bank which has a trust department in the State of Iowa. If you name an individual as trustee, you need to be confident that the person is trustworthy and will properly manage the assets of the Trust. Another consideration is to make sure that the individual trustee has ample time to properly perform the management of the Trust. The Trust can provide for compensation to an individual trustee or state that the person appointed as trustee is to act without compensation. If a bank is appointed, the bank will be compensated pursuant to their current fee structure which is based on the value of the assets in the Trust. Many banks will exclude from the calculation assets which do not produce income such as the homestead. One advantage of choosing a bank is that the Trust assets will be professionally managed on a day to day basis which will hopefully result in a higher rate of return. Banks are also bonded to cover any losses caused by the misappropriation of assets by the trustee. Typically, the trustor will act as the trustee initially. The Trust will set out the various successor trustees who will act if a trustee resigns, becomes incapacitated or dies.
A number of considerations come into play when deciding if a Revocable Living Trust is appropriate for an individual. If an individual has assets which would require probate, one consideration is to compare cost of probate to the cost of a Revocable Trust. Generally, the attorney fees to draft a Revocable Trust and transfer assets to the Trust, will be higher than to draft a Will. If a person’s Will is required to be probated, the Iowa Code sets the maximum fee that an attorney and executor can receive. The fee for each is 6 percent of the first $1,000.00 of assets, 4 percent on the next $4,000.00 of assets and 2 percent on the balance of the assets. Life insurance which is made payable to a named beneficiary is not included in the assets for purposes of computing the fee. In addition, attorneys can seek extra-ordinary attorney fees in a probate matter in regards to litigation matters, sale of real estate, and tax matters. Further, in a probate, court costs will be assessed based on the value of the assets of the estate. Attorney fees to handle the wrapping up of the administration of a Revocable Living Trust on death, which will include preparation and filing of trust notices, preparation of income tax returns, and distribution of trust assets, are determined by an agreement reached between the parties. One option is for the attorney to be paid an hourly fee to complete the Trust administration matters. On the larger estates, the fee may be based on 1 percent of the trust assets. Generally when a bank trust department is acting as trustee of a Revocable Living Trust, they will also request a 1 percent fee as trustee. It is important to emphasize that careful attention is required to make sure that all assets are properly retitled in the name of the Trust in order to avoid probate. If for some reason one or more assets are not transferred into the Trust, such may require the entire estate be probated. It is important to emphasize that all of the assets including the assets of the Trust come back into the estate under such scenario, not just the assets which were not retitled correctly.
It is important to note that just drafting a Revocable Living Trust is not sufficient. It is necessary for the client to work closely with the attorney to make sure that all assets and beneficiary designations are properly worded. In addition, it is important that any new assets acquired in the future are also titled correctly. For individuals who desire that their affairs be kept private, a Revocable Living Trust is a better fit than a Will. Generally, the Revocable Living Trust document will not be filed of record and the assets of the Trust will not be disclosed to the public.
Finally, the drafting of a Revocable Living Trust does not eliminate the need for a Will. In cases where said Trusts are drafted, the attorney will draft a simple pour-over Will which accomplishes two main purposes. First of all, the Will distributes personal household property, which is typically not retitled in the name of the Trust, among various beneficiaries. Secondly, if there are any assets which did not get retitled in the name of the Trust, the Will provides that such assets should be transferred or poured over to the Revocable Living Trust. As such, the asset will end up where it should have been, in
the Revocable Living Trust, but it will arrive too late in order to avoid probate.
If you are interested in discussing a Revocable Living Trust in more detail, please give our office a call.
By – James D. Beatty