Practices

Revocable Living Trusts

The revocable living trust is one of the oldest estate planning tools. Today, a revocable living trust is used for many reasons, including, but not limited to, federal estate tax savings, asset management and probate avoidance. However, is a revocable living trust right for you?

You may have heard your friend, co-worker or neighbor talking about her trust. You may have even felt left out without one for yourself. Just what is a trust? A trust is a legal arrangement or contract with respect to property in which a person (the "trustee") holds title to property for the benefit of another person or persons (the "beneficiary" or "beneficiaries"). There are two different types of trusts, e.g., living and testamentary. A living trust can be either revocable or irrevocable. The one we are going to discuss is called a "revocable living trust" or "living trust" for short. This type of trust can be amended or revoked; however, the right to amend or revoke the trust terminates at death or incapacity.

The living trust is established by a written Trust Agreement. The Trust Agreement is between the person establishing the trust and the trustee. The person establishing the living trust is commonly called the "grantor" or "settlor." The Trust Agreement shows the intent to create a trust, identifies the grantor, the trustee, and the beneficiaries, and states the terms of the trust.

Despite the claims by many legal practitioners, a living trust is not appropriate in all circumstances. Whether or not a trust is appropriate for you will depend on many factors, including, but not limited to, the size of your estate, your goals and objectives, your family situation and marital status. A review of the advantages and disadvantages of a living trust will help guide our discussion.

Perhaps the biggest advantage of a living trust is the ability to reduce or eliminate federal estate taxes for a married couple. By utilizing living trusts, a married couple can transfer up to $10,000,000 without federal estate taxes for 2012. Each person has a $5,000,000 federal estate tax exclusion amount in 2012. By establishing a separate trust for the husband and wife, a couple can transfer a combined $10,000,000 without federal estate taxes. If living trusts are not used, the surviving spouse is left with his or her own $5,000,000 exclusion amount, and the exclusion amount for the deceased spouse may be lost. So, if you are married and have a federal gross estate in excess of $5,000,000, living trusts may be right for you.

You do not have to have a large estate to justify the use of a living trust. There are many more advantages of a living trust. For example, a desire to provide for and protect someone is probably one of the most common reasons for creating a living trust. Although you could make a quick, convenient and uncomplicated outright gift, there are many situations in which such an outright gift would not effectuate your true intent. Minors lack legal capacity to manage property. A living trust permits the grantor to make a gift for the benefit of a minor without triggering the necessity for the minor to have a court-appointed conservator to manage that property.

An individual beneficiary may lack the skills necessary to properly manage the trust property as a result of mental or physical incompetence or lack of investment experience. By putting the money or property under the control of a trustee, you increase the likelihood that the beneficiary's interest will be served for a longer period of time. You may also have a special needs child or grandchild. A living trust allows you to set up special needs provisions for your child or grandchild without affecting his or her governmental benefits and eligibility.

Under Michigan law, you may protect trust assets from the beneficiary's creditors by including a spendthrift provision in a living trust. A spendthrift provision does two things. First, it prohibits the beneficiary from selling, giving away or otherwise transferring the beneficiary's interest. Second, a spendthrift provision prevents the beneficiary's creditors from reaching the beneficiary's interest in the trust. The spendthrift provision permits you to benefit your designated beneficiary but not worry about the beneficiary's creditors.

An outright gift gives the beneficiary total control over the way the property is used. With a living trust you can restrict the beneficiary's control over the property in any manner that you desire, as long as the restrictions are not illegal. This flexibility allows you to determine how the trustee distributes trust benefits. You can spread the benefits over time, give the trustee discretion to select who receives distributions and in what amounts, require the beneficiary to meet certain criteria to receive or continue to receive benefits, or limit the purpose for which trust property may be used, such as health care or education.

Perhaps the most popular reason for using a living trust is to avoid probate. Property in a living trust is not part of the probate estate upon the grantor's death. The property remaining in the trust when the grantor dies is administered and distributed according to the terms of the living trust; it does not pass under the grantor's will or by intestate succession. Generally, a living trust will accelerate asset management and distribution. However, the probate process in Michigan is relatively simple and not that expensive for a small estate.