Missouri Estate Planning – Trusts
What is a Revocable Living Trust?
A trust is an agreement that determines how a person’s property is to be managed and distributed during his or her lifetime and also upon death. A revocable living trust normally involves three parties: The Settlor – Also called grantor or trustor, this is the person who creates the trust, and usually the only person who provides funding for the trust. More than one person can be a settlor of a trust, such as when a husband and wife join together to create a family trust. The Trustee – This is the person who holds title to the trust property and manages it according to the terms of the trust. The settlor often serves as trustee during his or her lifetime, and another person or a corporate trust company is named to serve as successor trustee after the settlor’s death or if the settlor is unable to continue serving for any reason.
The Beneficiary – This is the person or entity that will receive the income or principal from the trust. This can be the settlor (and the settlor’s spouse) during his or her lifetime and the settlor’s children (or anyone else or a charity the settlor chooses to name) after the settlor’s death.
A trust is classified as a “living” trust when it is established during the settlor’s lifetime and as a “revocable” trust when the settlor has reserved the right to amend or revoke the trust during his or her lifetime.
How is a Revocable Living Trust Created?
There are two basic steps in creating a revocable living trust. First, an attorney prepares a legal document called a “trust agreement” or a “declaration of trust” or an “indenture of trust” which is signed by the settlor and the trustee. Secondly, the settlor transfers property to the trustee to be held for the benefit of the beneficiary named in the trust document.
Can a Revocable Living Trust be Changed or Revoked?
Yes. The settlor ordinarily reserves the right in the trust document to amend or revoke the trust at any time during his or her lifetime. This enables the settlor to revise the trust (or even terminate the trust) to take into account any change of circumstances such as marriage, divorce, death, disability or even a “change of mind.” It also gives the settlor the peace of mind that he can “undo” what he has done. Upon the death of the settlor, most revocable living trusts become irrevocable and no changes are then allowed (with some exceptions) to save taxes or improve administration. Sometimes the trust becomes irrevocable after the death of a spouse if the trust was jointly created by a married couple.
Is a Revocable Living Trust an Adequate Substitute for a Will?
No. A revocable living trust may be considered the principal document in an estate plan, but a will should accompany a revocable living trust. This type of will, referred to as a “pour over” will, names the revocable living trust as the principal beneficiary. Thus, any property which the settlor failed to transfer to the trust during his or her lifetime is added to the trust upon the settlor’s death and distributed to (or held for the benefit of) the beneficiary according to the trust instructions.
The settlor may not be able to transfer all desired property to a revocable living trust during the settlor’s lifetime. For example, the probate estate of a person who dies as a result of an auto accident may be entitled to any insurance settlement proceeds. These settlement proceeds can only be transferred from the estate to the trust pursuant to the terms of a will. Without a will, the proceeds would be distributed to the heirs under the Missouri laws of descent and distribution.
Also, a parent cannot nominate a guardian for minor children in a revocable living trust. This can be accomplished only in a will.
Will a Revocable Living Trust Avoid Probate Expenses?
Property held in a revocable living trust at the time of the settlor’s death is not subject to probate administration. Thus, the value of the property is not considered when computing the statutory fee for the personal representative or the estate attorney. Also, the amount of any required bond for the personal representative will be reduced to the extent the property is held in the trust and not subject to probate administration.
Nevertheless, certain expenses associated with the death of a person are not eliminated. Trustees are paid for their work unless they waive their fees. Deeds to real estate transferring the property from the trust to the beneficiaries must be prepared. Estate tax returns must be filed when the total value of the property owned at death (including assets in a revocable living trust) exceeds a certain value. The decedent’s final income tax returns must still be filed and income tax returns for the trust must also be filed. Trustees often seek assistance and advice from attorneys who charge fees.
What Are Some of the Advantages of a Revocable Living Trust?
In addition to the savings in probate expenses, the avoidance of probate administration has other advantages. The administration of a revocable living trust at the settlor’s death is normally a private matter between the trustee and the beneficiaries. Unlike probate, there are few public records to reveal the nature or amount of assets or the identity of any beneficiary.
Property can often be distributed to the beneficiaries shortly after the settlor’s death, avoiding much of the delay encountered with probate administration. Also, probate court approval is not necessary to sell an asset in a trust, thus avoiding further delay.
In addition to the avoidance of probate administration in Missouri, “ancillary” probate administration in other states where real estate is owned can be avoided by transferring the out-of-state real estate to a revocable living trust. For those owning real estate in several states, this can be a significant advantage.
Real estate, businesses, and other assets can continue to be actively managed by a successor trustee in central administration in much the same way as a settlor would have done before the settlor died or became incapacitated. For example, a trustee can use trust assets to pay utility bills to keep the pipes from freezing, property maintenance expenses, and real estate taxes until real estate is sold or distributed. The trustee might work out property distribution issues, such as some beneficiaries wanting the real estate while others want money.
What Are Some of the Disadvantages of a Revocable Living Trust?
Since a revocable living trust is a more complex legal document that must be funded by changing property titles while the settlor is alive, it is more costly to establish than a will, which can have higher expenses after death. Also, accounts need to be retitled, deeds and other transfer documents must be prepared transferring the settlor’s assets to the trust, and beneficiary designations need to be changed to the trust— all processes which can require a substantial investment of the settlor’s time.
The use of a revocable living trust requires more ongoing monitoring to ensure that assets remain in the trust and that newly-purchased assets are titled in the trust. For example, a settlor who moves a certificate of deposit (perhaps to obtain a better interest rate) must remember to advise the new institution to title the new account in the trust.
After the settlor’s death, some of the income tax rules applicable to a trust are not as liberal as those available to a probate estate. For example, a probate estate may elect to use a fiscal year as its tax year, while a trust is restricted to the calendar year. Trusts must pay estimated income tax payments while a probate estate is exempt from this requirement for the first two years. Trusts are also subject to other tax rules that do not apply to probate estates.
Who Can Serve as Trustee?
If the settlor becomes physically or mentally incapacitated, property held in this trust remains available to the settlor without the requirement of a court-supervised conservatorship. The successor trustee named in the trust document takes charge to manage the assets in the trust and pay the settlor’s bills.The successor trustee can be a trusted relative or friend, or can be a professional trustee such as a trust company or the trust department of a bank. Missouri law does not require an individual serving as successor trustee to be a Missouri resident. However, certain restrictions apply to banks or trust companies whose principal place of business is located outside the state of Missouri. Since the activities of the successor trustee are not ordinarily supervised by a court or other independent third party, the selection of the successor trustee should be carefully considered.
The settlor is not limited to naming only one trustee. Two or more individuals may be named to serve as co-trustees or a combination of individuals and a corporate trustee may be named. If more than one is named, care should be taken to designate who can pay the usual, ordinary expenses without having to take the time and expense of requiring more than one signature.
If an individual is to serve as successor trustee, the settlor should consider whether the trustee is to be bonded. The settlor’s decision should be clearly stated in the trust document. If a bond is required, the bond premium is normally paid by the trustee from the assets in the trust.