by Archie M. Richards, Jr., CFP^®
January 28, 2002

Jason Brown paid an estate planning attorney $2,500 to prepare a revocable living trust. It was a smart move.

All trusts are written documents which provide that one or more parties (the trustees) own and manage property for the benefit of others (the beneficiaries). The beneficiaries of Jason's trust include himself, his charitable interests, and other members of his family, living and unborn.

The terms "revocable" and "living" are key. Jason can revoke the trust or change its terms at any time. He also creates the trust during his life (as opposed to a trust under a will, which would come into existence after he dies).

The trust has no effect until Jason actually transfers his property into it. The ownership of his business, his house, his securities and bank accounts is changed to the name of the trust, this being The Jason Brown Trust. Jason, as sole trustee, continues to manage the property as before; the trust makes no difference on that score. All income and capital gains continue being taxed to him.

But when Jason becomes unable to manage his own affairs, the trust makes a big difference. The terms provide that when Jason is declared incompetent by two doctors, he is removed as trustee. His daughter Amanda becomes trustee, and the trust can no longer be revoked or amended.

The trust gives Amanda all the powers Jason could exercise when he was competent. She becomes responsible for the trust property, providing financial and personal support to Jason and his wife Melinda. Jason sold his business during his competency. But if he hadn't, the trustee would sell it or manage it herself. For all of this, Amanda is entitled to reasonable fees from the trust.

There is no better way for a person to be cared for after he or she is unable to do so than by a competent trustee of a well-drafted revocable living trust.

Upon Jason's death, neither the trust nor the property within it is subject to probate. Probate courts have jurisdiction over property transfers, usually after a property owner's death. But Jason wasn't the property owner; the trust was. The trust continues as before. No transfer is required, and no probate is necessary. The family therefore avoids the heavy probate expenses, long delays, and undesired public disclosures often caused by the probate process.

States differ as to the difficulties created by their probate courts. Massachusetts and California are very arduous. Florida is only a little less so. But Texas has quite a simple probate process. Connecticut, having no probate courts, is the best of all. (Connecticut does have probate courts; the statement is corrected in the 2/11/02 column.)

Beware of cookie-cutter trusts furnished by insurance and financial salesmen. A trust should be drafted by an attorney who specializes in estate planning.

Jason's trust provides that after his death, the trust property is used to care for his widow Melinda. It enables the $1 million federal estate tax deduction to be utilized by both Jason's estate and Melinda's estate upon her subsequent death. The savings of estate taxes are considerable.

After Melinda's death, the terms of the trust call for specific gifts to charities, with the balance distributed equally to his three children. If a child predeceases his parents, his or her share of the trust pays out to the surviving spouse and/or descendents. The share of any beneficiary under 25 continues to be managed by the trustee until the person reaches 25. For any beneficiary who is incompetent, the trust share continues for life. The trust does whatever Jason wanted it to do. The law prevents him from leaving his widow out in the cold, but the trust can otherwise lavish financial support for his favorite horse if he so desires.

Revocable living trusts 1) provide for a person's incompetence, 2) avoid the expense, delays, and public disclosures of probate, 3) help reduce estate taxes, 4) provide for the disposition of the trust property, and 5) enable subsequent beneficiaries to be supported in the event of youth or incapacity. Such trusts enable the right people to inherit assets at the right time, without rancor, handled by the right people, with the least cost. Not a bad deal.