by Archie M. Richards, Jr., CFP^®
November 25, 2002

Ruth asks, "I heard that a revocable trust can continue for as long as the trustees desire. Is this true?"

No, Ruth, it isn't. But first, here's a general explanation:

A trust is a written document (the "trust instrument"), which provides that one party (the "trustee") holds property for the benefit of other parties (the "beneficiaries").

The person who creates the trust is called the "donor" or "settlor." The kind of trust you mention, Ruth, a revocable living trust, is created during the donor's life. The donor registers most of her property into the name of the trust (The Jane Jones Trust). Whenever she likes, Jane can change the trust or even revoke it, canceling the trust altogether.

The trustee can be one or more persons. It can also be an institution, such as a bank. In event of a trustee's disability, death or bankruptcy, the trust instrument provides for a replacement.

The beneficiaries can be charities or individuals - even several generations of individuals.

With a revocable living trust, the donor can initially hold all three positions. In addition to being the donor, Jane can also be the trustee and the sole initial beneficiary. She can do with the property whatever she pleases.

But when Jane becomes disabled or incompetent, bingo, the successor trustee immediately takes over. The trustee takes a modest fee and manages the property for the benefit of the donor and her husband.

After Jane dies, the trustee manages the property for whomever the trust instrument specifies. After the spouse dies, for example, the donor's children may become beneficiaries. After they die, later generations may also become beneficiaries.

The trust doesn't have to last for a long time. After the death of the donor and spouse, for example, the property can be distributed immediately to the children - or perhaps those that are age 30 or older. The trustees do whatever the trust instrument says. In keeping with this, they try to do whatever the donor would reasonably do if she were alive and competent.

A revocable living trust has many advantages:

• It cares for the donor while disabled or incompetent.

• It provides that the donor's property be managed for the donor and her family, possibly for a long time.

• Finally, the property held in trust avoids probate. Probate courts have jurisdiction over the property of people who have died. But when the donor of a trust dies, the trust itself does not. It continues, possibly for a long time. Hence, no court jurisdiction. This enables the family to avoid considerable expense, delay, and publicity.

Returning to your question, Ruth, the trust lasts as long as the trust document says it should last. If the beneficiaries are charities, the trust can go on indefinitely. If the beneficiaries are individuals, the trust must terminate in accordance with a complex rule, called the Rule Against Perpetuity (meaning that the trust cannot be perpetual). But the rule permits a trust to last a good long time, perhaps even 120 years after the donor's death.

Mildred writes, "When my husband passed away two years ago, his insurance company put the proceeds of his life insurance policies into money market accounts. I filled out beneficiary forms naming my children as equal beneficiaries. After my death, will this money go to them tax free?"

The money will go to your children free of income tax, Mildred. But if your estate is large enough, the property may be subject to federal estate tax or state inheritance tax. It's the estate that pays these taxes, not the children.

Mildred also asks, "I own railroad stock passed to me at my husband's death. My children are named as joint tenants with me. What happens to this stock?"

If the stock is in joint name with the right of survivorship, it passes to your children on your death. You might check with an attorney or financial planner to make sure the stock is registered correctly.