A revocable living trust is the primary estate planning document. It is created by a trust agreement signed by the trustmaker (sometimes called the grantor) and one or more current trustees. The trust agreement provides that the trustee(s) will hold and administer the trust's assets for the trust's beneficiary or beneficiaries. You will be the trustmaker, current trustee and current beneficiary of your trust. If you are married you and your spouse will be the trustmakers, current trustees and current beneficiaries if you create a joint trust. A married person can also have a trust that does not include the spouse as a trustmaker or a current trustee or beneficiary.
For example, Homer and Marge Simpson are the trustmakers and trustees who sign their trust agreement. The current beneficiaries are Homer and Marge who have total control over their assets in the trust because they are the trustees. If one of them dies the other will be the sole trustee and sole current beneficiary. If both of them die the beneficiaries will be their three chidlren equally. If a child is below age 25 when both parents die, the trust agreement names Ned Flanders as the successor trustee who will administer the trust's assets for each child until the child is old enough to become the trustee of the child's trust that owns the child's share of his or her inheritance.
Trustees
The trustee manages the assets in the trust for the benefit of the current beneficiary or beneficiaries. A trustee of a trust signs the trust agreement and has the legal obligation to carry out the trustee's duties stated in the trust agreement. Trustee has a fiduciary duty to carry out the trustee's obligations in the trust agreement. If a trustee breaches the trust agreement the beneficiaries can sue the trustee. When you create your revocable living trust you are the trustee and beneficiary so you won't sue yourself if you don't carry out the trustee's duties in the trust agreement.
Current Trust Beneficiaries
The current beneficiary or beneficiary is the person or people for whom the trustee manages the trust assets. When you create your estate planning trust you will be the current beneficiary. If we create a joint trust for you and your spouse both of you will be current beneficiaries. As a current beneficiary you can spend trust assets however you wish with no restrictions.
Future Trust Beneficiaries
Your trust will provide who inherits your assets if you die or if you and your spouse die if you are married. This person or these people are future trust beneficiaries. The successor trustee(s) duty is to manage the trust's assets for the future beneficiary or beneficiaries.
Trustees can pay money to a beneficiary, lend money to a beneficiary or pay the beneficiary's expenses. If the beneficiary is going to college the trustee can pay the tuition, books and room and board. If the beneficiary needs money for healthcare the trustee can pay for the healthcare or reimburse the beneficiary who spends money on healthcare.
Revocable Living Trusts vs. Irrevocable Living Trusts
Estate planning trusts are revocable living trusts. It is called a living trust because it is created by the trustmaker when the trustmaker is alive. Trusts can also be created in a Last Will & Testament, but those trusts are not created until after the person who signed the Will dies.
A revocable living trust is a trust that can be amended by the trustmaker. You want your estate planning trust to be revocable so you can amend it from time to time so it always reflects changes in you life. For example, if the person you name in your trust to be the first successor trustee dies, you can amend the trust to replace that person.
Irrevocable living trusts cannot be amended unless the trust agreement has language that allows amendments in certain circumstances or a court orders an amendment. The trusts we create for our clients children are irrevocable trusts because parents want their plan to be carried out rather than a child being able to change the parents' plan.
Asset Protected Trusts
Revocable trusts do not give the beneficiaries any asset protection. Your creditor can reach all of the assets in your revocable living trust. An irrevocable trust a parent creates for a child that is funded with the parent's assets can be an excellent asset protected device because the parent gives away the asset, which is why the parent's creditors and ex-spouses cannot get any assets in the irrevocable child's trust. Caution: If the transfer of assets by the parent to the trust is a fraudulent conveyance then the parents creditors can get those assets from the child's irrevocable trust.
Our Trusts Create Irrevocable Asset Protected Trusts for Children
The trusts we create for our estate plan clients provide that on the death of our client or client and spouse (if our client is married) an irrevocable asset protected trust will be created for each child. The child can be the trustee in charge of the assets in the child's trust. The inherited assets in the child's irrevocable trust protects the inherited assets from the child's creditors, ex-spouses and bankruptcy. See my articled called “Beneficiary Controlled Asset Protected Irrevocable Trusts.”
Taxation of Revocable Living Trusts
Because a revocable living trust is revocable the IRS pretends like the trust does not exist. Revocable living trusts do not file federal or state tax returns or pay any taxes. All income and deductions earned by the revocable living trust are reported on the trustmaker's tax returns and the trustmaker pays any the taxes.