by David R. Kenerson, Jr. and Niklas K. Oskarsson
The Nature of a “Trust:”
You can create a trust in your will that comes into being only at death, or you can create one while you are living. You can make it revocable or irrevocable, and in this case we are talking about creating a revocable trust for your own benefit. And because you are creating it during your lifetime it is known as a Revocable Living Trust.
A trust is a set of instructions given to the Trustee or Trustees whom you will name in the document, that tells them how to manage the property and who is to receive the benefit of the property and when.
You can name yourself as trustee, and in addition you might name your spouse or one or more children as a co-trustee(s), or as successor trustee(s). We prefer using a co-trustee designation so that if you become unable to act as trustee, your co-trustee can continue to act without a hitch, or a letter of resignation.
During your lifetime, a Revocable Living Trust for your benefit allows you to treat the property in it just as though you owned it outright outside the trust. You can take all of the income as well as the principal for your own needs whenever you want in such amounts as you want.
With proper drafting, your co-trustee can provide for you in the event you become disabled or unable to act by paying your bills, providing spending money for groceries, and taking care of you in all the ways you would take care of yourself. Not only should your trustee have the power to pay money to you, but also to “apply” or use the funds for your benefit by being authorized to pay others for your benefit.
Since you have control over all the property in the trust as trustee and since you have the power to revoke the trust, all the income and taxable capital gains are going to be taxed to you on your income tax return. That is no different than if you owned the property outright. The good news, though, is that your trust will not need to file its own tax return until after your death.
Some lawyers have said, “why bother” with a revocable trust when a power of attorney will do just as well. That is true in some cases, but not all. As co-trustee of a brokerage account, one has greater ease of management and transfer of the brokerage account assets, than one does using a power of attorney. Many institutions do not recognize someone else’s (i.e. not drafted by the institution) power of attorney. However, the co-trustee can do so with ease, assuming the account was opened with the co-trustee as a named account holder. So one benefit of having a co-trustee is the ease and facility of administration of your property.
It is quite possible to transfer your tangible personal property (clothing, furniture, etc.) to your trust and to transfer your residence to it as well. If all assets have been transferred to the trust, its administration occurs without hitch at death. There is no waiting for probate, i.e. for the will to be approved by the court; there is no rehiring of the investment advisor with a whole new set of papers, etc., and control over funds with which to pay funeral expenses and current bills is immediate. The nuisance value is considerably less. The trust will then pay any expenses of last illness, lawyers fees etc. and can distribute the decedent’s tangible personal property to the surviving spouse or children – who can then themselves make gifts to charity of the things they don’t want.
The common arguments against doing as we suggest are that one incurs the cost of drafting the revocable trust perhaps long before death. However, our experience suggests that drafting a will and revocable trust will cost marginally more or the same as drafting a testamentary trust. The cost is not so much in the drafting but in the time spent with the client understanding their objectives and asset picture and working through the desired provisions of the trust with the client – something needed in both cases.
The second argument is that one incurs transfer taxes in transferring the residence, which might be sold before your death in any event and these can amount to several thousand dollars. Our thought is to keep the title in joint name with the right of survivorship until the first spouse dies. Then, it may make sense to transfer the house to the trust.
Thus, we think the benefits in terms of the ease of administration and your care, warrant consideration of using a revocable living trust. The final benefit is that in the process of putting it in place, you will be organizing your affairs so that others can take over easily.
The information based here represents the judgments and opinions of the management of Virginia Global Asset Management and not intended as financial advice.