Probate Avoidance Plan

Revocable Living Trust

A revocable trust is created when a grantor transfers assets to another person, as trustee, under a written agreement that gives someone, usually the grantor, the power to revoke, alter, or amend the trust. Many states also recognize as valid transfers by a grantor to himself, as Trustee, commonly referred to as a declaration of trust. If the grantor can revoke the trust, he can reclaim the assets free of the trust. A trust created during the lifetime of the grantor is a living (or inter vivos) trust, and the grantor often retains the right to income for his lifetime. When the grantor dies, the trust assets are either distributed to, or held in further trust for, other beneficiaries. A revocable trust that survives the grantor’s death can play an important role in the grantor’s estate plan, insulating assets from the probate process

The power of revocation may be a limited one. For example, the power may arise only when certain events occur, such as marriages, deaths, or economic changes. The power may also be given to others, so that the grantor is no longer free to amend or revoke the trust. This allows interested parties to get at the trust assets should circumstances change, and provides a degree of flexibility not readily available when irrevocable trusts are involved. Any power concerning revocation that the grantor wishes to retain should be expressly reserved. Such powers are not usually presumed. Generally, powers of revocation that the grantor has retained cease at his death, and the trust becomes irrevocable. However, powers given to others may be made to continue after the grantor’s death.

Planning Note

Effect of State Law. The question of the revocability of a trust may be determined by state law. While a power of revocation is usually expressly reserved in the trust instrument if the grantor desires it, state law may presume a power to revoke exists unless there is an express statement of irrevocability. In other states, a spouse may revoke a transfer of community property in trust, if the transfer was made without the spouse’s written consent. Often, a grantor’s right to deal freely with trust property (i.e., to borrow, purchase, or sell it) is treated as a power to revoke the trust or otherwise revest the assets in himself. State law, or an express restriction in the trust instrument, may limit the grantor sufficiently to avoid his being taxed on the income.

A typical revocable inter vivos trust allows the grantor to retain control over trust assets, and to receive the income from the trust property during his lifetime. Daily management responsibilities are transferred to the trustee. In addition, the grantor can access the trust assets, if necessary in the future, or can make changes in the administration of the trust after he sees how the trust, the trustee, and the beneficiaries function.

A revocable living trust is most appropriately used in conjunction with a will. Even though the grantor may place most of his assets in the trust during his lifetime, there will usually be some property which is not so transferred and which remains part of his probate estate. A will acts as a complement to the trust, pouring over the probate assets into the trust after the grantor’s death.

The revocable inter vivos trust can serve an important function in estate planning. One or more of the following advantages may be secured by using the living trust as a device for post-death distributions:

1.)   The inter vivos trust can provide relative privacy and efficiency, and prevent inordinate delays in distribution, because of its freedom from the probate court requirements of inventory and accounting.

2.)   The administration expenses involved in managing and distributing the trust property may be less than the expenses of probate, especially when children are beneficiaries.

3.)   The governing law, especially from the viewpoint of income accumulations, rights of creditors, and the rule against perpetuities, can generally be selected by the grantor.

4.)   Ancillary probate proceedings can be avoided if property not situated in the grantor’s state of domicile is transferred to a trust rather than remaining a part of the grantor’s probate estate.

5.)   The living trust frequently minimizes the risk of an attack on the post-death scheme of distribution when the attack is based on a claim of mental incapacity, fraud, or undue influence.

6.)   The living trust may set the pattern, during the grantor’s lifetime, of management procedures and responsibilities, which continue without interruption after incapacity or death.

7.)   The grantor is able to watch how the fiduciaries he has chosen operate and, therefore, to determine whether any changes are necessary.

8.)   An inter vivos trust may be coordinated with the grantor’s will to provide for pour-overs between the trust and the grantor’s estate. Also, the inter vivos trust may be divided into marital and nonmarital trusts at the grantor’s death.

Top Reasons to Create a Trust

1.)   A trust will protect an inheritance from creditors, bankruptcy, liens, and divorcing spouses.

2.)    A trust can help you save money on the estate tax, inheritance tax, generation-skipping transfer tax and gift tax. Hire the right attorney to give you the individual advice and counsel for your assets and situation.

3.)   Protect disabled family members or those who may apply for Medicaid soon. A person receiving SSI or Medicaid should receive an inheritance in a Special Needs Trust so that she won’t be disqualified.

4.)   Bypass probate with a living trust a/k/a revocable trust a/k/a management trust a/k/a living revocable trust. It has just as many uses as it does names. This type of trust is called living because it is effective during your life. It is called revocable because you can change it, amend it, or revoke it (terminate it).

5.)   A revocable trust is most beneficial for:

  • Someone who owns real property in more than one state;
  • Someone who has children from more than one relationship (step-children);
  • Someone in a relationship who is not planning on marrying; and
  • Someone who doesn’t want an inventory of their property filed in the public records.

6.)   The reason a revocable trust bypasses probate is because all the property the trust owns does not belong in the probate estate. If you already purchased a trust but have questions regarding the full transfer of your property, we offer Trust Reviews to protect your assets should the worse happen.

Tips for Trustees

A trustee has fiduciary duties. Trustees comply with these duties when they follow five simple rules:

1.)    Funds from a supplemental needs trust can only be used to pay for things that are not basic needs like food and shelter.

2.)    Follow the terms of the Trust;

3.)    Engage a good attorney and communicate with him often;

4.)    Keep records; and

5.)    Communicate with beneficiaries.

I. Fiduciary Duties

When asking our clients to choose a trustee for an inter vivos or testamentary trust, we advise them to choose, appropriately, someone they trust. This is because the law imposes certain duties upon a trustee known as “fiduciary duties.” Fiduciary duties are the highest duties in law. Essentially, they encompass the kind of principles that would apply to any relationship of trust, such as that between friends or family members. Although it may be difficult to provide an exact definition, fiduciary duties include, but are not limited to, a duty of loyalty, a duty of care, a duty of impartiality, and a duty to preserve and protect assets. A trustee should be someone who is capable of living up to the high standard the law demands.

The duty of loyalty is perhaps the broadest duty a trustee has, and for that reason deserves the most attention. The duty is, on its face, self explanatory – a trustee must be loyal to the beneficiaries. Keeping secrets, fabricating the truth, or even conveying only part of the truth would be completely contrary to the duty of loyalty. The trustee should be selfless in dealing with the beneficiaries. Any attempt to profit or personally gain from the trust would also be a clear violation of the duty. Other than the reasonable compensation provided for the trustee in the trust agreement, the trustee should have no financial interest in the trust. The duty of loyalty also includes a duty to avoid conflicts of interest. If a situation arises where the trustee must choose between the beneficiaries and a competing interest, the loyalty the trustee owes the beneficiaries must prevail.

The duty of care is also extremely broad. It requires the trustee to perform her duties with skill and precision. Decisions must be thoughtfully weighed in consideration of any and all factors that might affect the outcome. Much like motorists have a duty to drive with safety and prudence, a trustee must guide the beneficiaries down a safe and secure road. The duty of care also applies to the delegation of authority. Although “a trustee is not required personally to perform all aspects of the investment function,” a decision to pass on responsibility to another must be done with utmost care and concern.

The trustee also has a duty to deal with each individual beneficiary on an impartial basis. All beneficiaries are entitled to be furnished with information, have access to records and accounts, and in general, be treated equally. This duty serves to protect the “remaindermen,” that is, people who are not presently benefiting from the trust, but who will in the future. The trustee should follow the Texas Uniform Principal and Income Act to insure remainder (future) beneficiaries are not unfairly discriminated against. A trustee must deal fairly with all, preserving the rights granted in the trust agreement.

The trustee also has a duty to exercise reasonable care to protect and preserve trust assets. The trustee must take control, and remain in control of the property at all times. The trustee must protect the property from loss by investing the trust assets appropriately, and enforcing and defending claims against the trust. In Texas, trustees must follow the Uniform Prudent Investor Act. The Act provides “A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust.” It is also essential that the trustee refrain from combining her personal funds with the trust funds. This may require keeping the funds in separate bank accounts, or in the case of tangible goods, storing such goods in a separate facility.

Remember that the concept of “fiduciary duties” is broad, and accordingly, is not limited to the duties mentioned above. These descriptions are intended to convey the standard to which the law holds a trustee. Again, it is because the law imposes such a high standard that a trustee should be someone the client completely trusts. Doing so will prevent future complications and minimize the possibility of litigation.

II. Consequences for Breaching a Fiduciary Duty

Generally, a trustee can be held liable for improper performance as trustee under criminal laws or civil laws or both. Fiduciaries are more likely to be held liable for money damages than to be prosecuted for crimes. It is possible, however, for the local prosecuting attorney to impanel a grand jury and secure an indictment for prosecution.

Executors, Trustees, and Agents under power of attorneys that steal from a principal or estate can be prosecuted under criminal law and held liable for civil monetary damages. The legal term for stealing from a deceased person’s estate is “misapplication of fiduciary property.” An individual stealing from an estate may also be charged with theft, commercial bribery, and/or “securing execution of a document by deception,” if appropriate.

There are different methods of determining monetary damages arising from a civil lawsuit against a trustee. The Texas Trust Code provides that “a trustee who commits a breach of trust is chargeable with any damages resulting from such breach of trust, including but not limited to: (1) any loss or depreciation in value of the trust estate as a result of the breach of trust; (2) any profit made by the trustee through the breach of trust; or (3) any profit that would have accrued to the trust estate if there had been no breach of trust.” Trustees can also be required perform a duty, refrain from breaching the trust, “redress a breach of trust,” “pay money or to restore property,” account, submit to a court appointed receiver, be suspended or removed, be denied compensation, or submit to any other appropriate court ordered relief.

Trustees have a duty of loyalty, duty of care, duty of impartiality, and the duty to protect and invest trust assets. There are many sub-duties under each of the duties explained above, and this list is a good overview of each duty. A trustee should not rely entirely on a memo such as this, and should engage trusted professionals to properly carry out the terms of the trust.

Generally, a trustee will not be held liable for civil damages or criminal penalties as long as he or she follows the terms of the Trust and does not break the law. Trustees do not need to be sophisticated enough to draft all the legal documents, invest all the trust assets, or account for all the receipts and expenditures; the trustee should only be sophisticated enough to hire good professionals to assist in these duties. A trustee does have a duty to exercise care in delegating duties, so trustees should engage a good attorney and communicate with him often. The most important practical steps the trustee can take are to keep current and accurate records and to communicate with beneficiaries often.

  • TEX. PROP. CODE Chapter 116 (Vernon’s)
  • TEX. PROP. CODE § 117.004 (Vernon’s)
  • Tony Plohetski, Fighting the Touchy Battle of Estate Theft,Austin American-Statesman (Sunday, December 10, 2006); TEX. PENAL CODE § 32.45 (Vernon’s)
  • TEX. PENAL CODE § 31.03 (Vernon’s)
  • TEX. PENAL CODE § 32.43 (Vernon’s)
  • TEX. PENAL CODE § 32.46 (Vernon’s)
  • TEX. PROP. CODE § 114.001 (Vernon’s)
  • TEX. PROP. CODE § 114.008 (Vernon’s)