The major problems of senior citizens are how to manage financial affairs upon disability and how to distribute property at time of death with the least trouble and expense.
In the past, before the living trust concept became popular and certain recent laws were enacted, many solutions were proposed to the problems of caring for financial and health matters. General and special powers-of-attorney were proposed, as were placing title to property in another’s name by the “gift” method, creating “joint tenancies”, executing deeds and not delivering them, and probably many more unique solutions – all of which have their problems.
The legal concept of the “inter-vivos revocable trust,” which is the legal name of the living trust, has been available (but not frequently used) for hundreds of years. A notable early use was by President Thomas Jefferson, who used a living trust to settle his estate. It has become quite popular in recent years, and now it appears to be the best solution to managing financial affairs and to distributing property at the time of death.
The word “inter-vivos” means “during life-time” and the word “revocable” means that the person can change his mind and alter and/or cancel the executed trust instrument. Such a trust often is called a “living trust”.
The cast of players in a living trust are as follows:
Settlor or Trustor: This is the person who establishes the living trust. In other words, if you wanted a living trust for yourself, you would be the settlor. The settlor is in control and is the boss of the living trust.
Trustee(s): This is the person or persons who officially manage and act for the living trust. If a document needs to be signed, it is signed by the trustee(s). If assets are to be purchased or sold, the transaction is handled by the trustee(s). A living trust can have one or more present or future trustees. The settlor (yourself) ordinarily acts as his own trustee. Single persons may just have one trustee (himself) or more than one trustee (perhaps a child), depending upon their wishes and circumstances. Ordinarily, married couples both serve as trustees of each other’s living trust.
Successor Trustees: These are persons named in the trust document to step in and serve as a future trustee if they are needed. For example, in a couple’s living trust, each spouse becomes sole trustee if something happens to the other spouse (death or incapacity). After the remaining spouse can no longer serve as sole trustee (death or incapacity), a successor trustee can serve (usually a child).
Life Beneficiaries: During the settlor’s life, ordinarily only the settlor, settlor’s spouse and minor children (if desired) are authorized to benefit from the living trust.
Death Beneficiaries: A living trust actually has a will built into it. This part of the living trust directs who gets what you own after your death.
HOW A LIVING TRUST WORKS
A living trust works very similarly to a corporation. Think of a national gasoline chain where you purchase gas. If we were to go to that corporation’s headquarters and ask what gave it legal birth, we would find a set of legal documents signed by the incorporators of the business. The incorporation papers they signed would be like a contract with themselves. The incorporation papers would give the corporation a name, designate its internal government and operating method and outline what it could and could not do and what officers had power to act for the corporation. Once that was done and the papers were signed, a corporation began. This corporation as a matter of law became an artificial person. It has the same legal rights that you and I have. It can hire people to work, buy property, own property, sell property, make investments, pay debts, etc.
A living trust is similar to a corporation because it operates like an artificial person. Once a living trust is properly drawn up and signed, it springs to life. A living trust is legally capable of doing anything you can do yourself with your property. It can also pay debts, incur debts, hire employees, etc., just the same as you have always done.
A living trust has some great advantages. For one, it does not get sick or die, like you or I will do. What happens if you have a living trust and become ill? A living trust is designed so that a successor trustee can be appointed if the initial trustee gets ill or dies. This might seem strange, but corporations replace officers routinely without affecting the corporation. You or I might get sick or die and a new trustee be appointed, but the trust will still work as it was designed to do.
PARTS OF A LIVING TRUST
A living trust can be tailored especially for you. It can include:
Lifetime Care: Every living trust should have provisions in it to provide for the settlor, the settlor’s spouse and children (usually if minors or disabled) during the settlor’s life. Isn’t this what we do now? Of course. Therefore, if something happens to incapacitate you, the trust should behave as you would have if you were able. You can be very specific about who will benefit and to what extent.
Control Clause: This is the part of the living trust that makes the settlor the boss. You may revoke it in part or wholly at any time during your life. You retain control over your affairs by using a living trust.
Probate Clause: Yes, here is the terrible “P” word. Don’t panic. A living trust avoids probate. Really, what is probate? It is basically the family representative rounding up the assets and debts of the deceased; then, following the court rules on paying debts and distributing the assets. Most of us could understand our ancestor’s wills and do what they tell us without court supervision if we were allowed. In fact, most wills are simple wills … all to my spouse and then all to the kids. It doesn’t take a brain surgeon to figure out that you need to pay the valid debts, file the tax returns, pay the taxes and finally distribute the inheritance to the heirs. A living trust has a “winding up of affairs” or “probate clause” in it. It authorizes the trustee on his or her own to pay the valid debts, locate and gather up the assets, file the tax returns, pay the taxes and finally to distribute the assets. Most families are capable of doing this by themselves without the need of probate court supervision. When this is the case, the family reaps the savings by avoiding probate.
Will or Death Clause: This is the part of the living trust that acts like a will. Just picture your will being built into a living trust. This part determines which heir gets an inheritance and which heir gets nothing.
Upon the death of the Settlor, the assets of the trust will be distributed according to the provisions of the trust instrument. These provisions are very similar to the provisions found in a will. I like to say a living trust has a will built into it. The principal difference is that a will must be submitted to the court for probate, whereas the assets of the trust can be distributed without any court action. However, an Oklahoma Estate Tax Return still must be filed. Sometimes a Federal Estate Tax Return must be filed, and a tax release obtained, if anyone other than the surviving spouse inherits the estate.
Trustee Succession Clause: This clause is a very effective weapon at preventing a court supervised guardianship. I have never had a client look forward to having to be appointed guardian of their parent or spouse. Often the parent will never get over what they interpret as the child having them declared “crazy” and taking over. Incapacity is bad enough in itself without having to involve the family in a court conflict. This clause may avoid that. The living trust will have already named who shall be successor trustee. Normally a living trust contains a mechanism for determining when this is needed. Often a letter from the family physician is needed. If the parent becomes incompetent or senile and needs some help, the successor trustee can gently assist their parent by becoming the successor trustee or a co-trustee with the parent. If the parent is unwilling, a letter from the parent’s physician can serve as a trigger to allow the successor trustee to assist. Of course, the parent may object and if they wish, file for a court hearing. In practice, I have found this to be rare. I have found the senior citizen’s family grateful that the family’s money was not consumed on bickering in guardianship court. If you were concerned some of your family could overreach and try to push you out as trustee, you could make that most difficult. You could provide that can occur only if “a trusted friend agrees,” or “your trusted family doctor agrees,” or “all of your children agree,” or “three board certified psychiatrists agree,” or any combination you desire agree. Other restrictions could be added. In the average family, only some protection is necessary. I usually provide that a letter from the family doctor or from two other doctors, will act as a resignation from the office as trustee. I also provide limited powers of attorney that each trustee can sign which allows any other trustee to sign a resignation for the family, if desired. What is used of course, depends upon your wishes and circumstances. Compromises can be worked out for that unique family to protect the independence of the senior citizen and yet protect the senior citizen from whatever disabling condition they may someday have.
Power of Attorney or Trustee Powers Clause: Most people know about powers of attorney. You may have given someone a power of attorney at some time in your life. Built into the living trust is a set of powers for the trustee. These are very similar to the powers in a power of attorney. There is one big difference. A power of attorney terminates at death, but the powers of a trustee do not and continue past the settlor’s death to allow the trust to fulfill its mission.
WHAT NAME FOR THE LIVING TRUST
The name for a living trust is usually the Settlor’s name. For example, the “John Doe 2018 Revocable Trust.” The trust instrument would provide that the “Settlor” may transfer all of his assets into the trust. This means you wold create in the name of the trust, a new savings account, change the name on stocks and bonds, execute a deed to all real estate to the trust and transfer most other assets into the trust. Checking accounts used for operating expenses are not ordinarily put into the trust. These checking accounts ordinarily contain smaller sums of money. When money builds up it is usually transferred to savings, etc. You may not want to change the checking account name because the name on the checks usually are changed. If that is the case, you may want to use a joint checking account agreement and putting a third party on the account as joint tenant. The third party agrees that they are really a trustee and if anything happens to you, to use the account only for your benefit or to pay it over to the official trustee. Usually the third party is the first successor trustee (normally a child).
TRANSFER ASSETS TO THE LIVING TRUST
Not all property is automatically placed in the trust. For example, usually tax deferred retirement type savings or plans, such as IRA’s, 401K’s, etc. receive more favorable income tax treatment if the surviving spouse is left as primary beneficiary. Sometimes the trust is made contingent beneficiary.
Ownership of real estate and mineral interest both in Oklahoma and in other states should be transferred to the living trust.
Thereafter, your property will be held in the name of the living trust and will be subject to management by the trustees. The settlor can be the initial trustee for as long as the settlor is able to manage his own affairs. The settlor can do as trustee anything that the settlor could do with the property as an individual owner.
When a living trust is created, it is quite important to transfer the settlor’s assets into it as only in this manner can the costly probate procedure be eliminated. Probate procedures are expensive and time consuming. If there is failure to transfer title, especially of real estate and mineral interest, to the trust, it is almost impossible to transfer title on death (either with or without a will) without a court supervised probate procedure.
COST OF A LIVING TRUST
There is an initial cost in preparing the trust instruments and there is a cost in transferring assets into the trust depending upon how much effort is required of the attorney doing the work. If there are many assets for which assistance is needed in transferring title to the trust, the cost is greater than if there are few assets. The total cost depends on how much time and effort is expended by the attorney. Some transfers can be a “do-it-yourself” job (bank accounts, life insurance, stocks, etc.). You can reduce costs by taking care of these yourself.
The cost at the time of death should be considerable less under the living trust procedure than under the probate procedure, as attorney’s fees and court costs applicable for probate will be eliminated. However, the principle purpose of executing the trust is ease of management.
Also, another feature many persons find highly desirable is privacy. All probate documents are available at the courthouse for public inspection. These documents may contain an inventory of the decedent’s estate. An inventory of the settlor’s estate is not itemized in the living trust document, and the living trust document generally is not required to be recorded at the courthouse. Therefore, it is difficult for a stranger to ascertain the trust assets.
POUR OVER WILL
Even though a trust is executed, a new will also should be executed at the same time. It is entirely possible that some of the settlor’s assets are overlooked when the transfers are made into the trust, or, sometime afterward he may take title by purchase, gift or inheritance solely in his name. Therefore, there should be a will to provide for a situation in which something has been overlooked. The will should have a special provision relating to the trust. This is called a pour over will.
I hope this information is helpful to you. The legal rights of our senior citizens are very important. My purpose in providing this information is to make more people aware of these rights and to become sensitive to the issues facing many of our senior citizens.
This is an introduction to the legal issues of living trusts. It is not intended to serve as legal advice, except of a general nature. You should always seek the advice of an attorney skillful in living trust law. The particular application of the law to your fact situation can be substantially different than the general rules of law.
If you would like to know whether a living trust would be right for you, call Brent D. Coldiron at (405) 478-5655 or 737-2244. Brent has offices at 1800 East Memorial Road, Suite 106, Oklahoma City, OK 73131 or 2801 Parklawn Drive, Suite 503, Midwest City.