Volume 10 Issue 6
What Do I Do With These? Part II
© by Tax & Business Professionals
In our previous issue, we talked about what to do if you are not a whiz at
estate planning and a client asks you to examine his Will and Trust. We focused on two of
the three channels through which the assets of a decedent pass to others.
As we indicated in concluding Part 1, Paul Maloney, CPA, of Abington,
Massachusetts, had two sets of Wills and Trusts from two law firms in the Boston area. The
lawyers were each alleging that the documents prepared by the "other" law firm
were lacking in some material respect. Paul turned to The Tax and Business Professionals
for an independent opinion in a very confusing situation and we assisted him.
This newsletter will focus on Trusts, the third channel through which a
decedent's assets pass to others.
What is a Trust and How Can it Benefit a Client?
Trusts, like corporations, partnerships, and limited liability companies, are
figments of the imagination, so to speak. They can also survive the death of the creator
of the Trust, often called a Grantor, Settlor, or Trustor. All Trusts have at least three
players: (1) the Grantor - the creator, (2) a Trustee that performs fiduciary duties, and
(3) the Beneficiary who receives the benefits or assets of the Trust.
A Trust created while the Grantor is alive is called a Living or Inter Vivos
(Latin for Living) Trust. Trusts can also be created in Wills. This type of Trust is
called a Testamentary Trust. In Paul Maloney's situation, mentioned earlier, one set of
Trusts was Inter Vivos Trusts, the other set was Testamentary (in a Will). This
precipitated adverse comments from the opposing attorney who did not draft Testamentary
Some estate planners don't like Testamentary Trusts because Wills, by
definition, can never be effective until death. Thus Trusts created by a Will cannot be
funded during life, and the assets that eventually go into the Testamentary Trust must
first go through probate.
There are some other weaknesses of Testamentary Trusts. What is the most likely
thing to happen to an elderly person before death? Incapacity. While living trusts can be
very useful in that situation, Trust provisions in a Will are of no help in such a
situation While it would be unreasonable to categorically condemn Testamentary Trusts,
they do have some limitations.
Effective During Life
As the name implies, Revocable Living Trusts (Inter Vivos) are created during
life and are changeable or revocable. Most importantly, they can be funded during life and
are effective immediately. The ability of Living Trusts to act now, rather than at death,
creates some practical advantages. If the Grantor is incapacitated, elderly, or simply
wants to turn management of Trust assets to a younger generation or a financial
consultant, the Grantor can do so. Revocable Living Trusts afford the Grantor the ability
to stop being the Trustee at any time.
In most revocable trusts, the Grantor usually performs (but is not required to
perform) all three of the roles (Grantor, Trustee, and Beneficiary) while he or she is
capable. Because most Revocable Living Trusts are designed to avoid probate and reduce
estate taxes (in larger estates), these objectives can be met if the Grantor remains
Trustee and Beneficiary until death. Moreover, most Grantors want to control the Trust
assets and benefits (income) from them while they are of sound mind and body.
After the death of the Grantor, obviously the Grantor can't be the Trustee, nor
should the estate of the Grantor be a beneficiary of the Trust. This is when Successor
Trustees and Beneficiaries come into the picture.
Why Trusts are Lengthy Documents
Some professionals and clients recoil, in disbelief at the length of Trust
documents. When a Trust is executed, no one knows how long the Grantor will live, or if
the spouse and children will survive the Grantor. Covering the range of possibilities and
having effective Trust provisions for grandchildren of the Grantor requires a few sheets
of paper. Many Trusts are 20 or more pages because the range of what ifs is extensive.
Who should take over when a Grantor dies or becomes disabled? The surviving
spouse and an adult child, two or more adult children, a family friend, a trust company,
and a trust company in combination with a family member, are some of the choices. The
choice of successors is not endless, but it is quite broad. There are some caveats. While
the surviving spouse, alone, can be the sole successor Trustee, such a choice is usually
ill founded, in part because the surviving spouse is usually close in age to the Grantor
and may be losing some abilities. For this reason, having an adult child or a trust
company involved, seems to make sense.
Many trust companies prefer to be the Sole Successor Trustee, but there are
problems with such an arrangement. With the advent of megabanks, the trust departments of
many of them have been centralized and are often nowhere near the family of the Grantor.
Communications and continuity can be problems. It usually is advisable, therefore, to have
a family member as a Co-Trustee with the trust company.
Next issue, Part Ill of this series, will deal with Trusts and the distribution
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