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The revocable, or “living,” trust is a way to avoid probate and, potentially, save taxes at death. A revocable trust has certain advantages over a traditional will, but there are many factors to consider before you decide if a revocable trust is best suited to your overall estate plan. There are certain administrative tasks that come with acting as trustee of a trust, whether it is during the life of the Settlor or after his or her death.
A revocable trust is a document (the “trust agreement”) created by the “Grantor” or “Settlor” to manage assets during their lifetime and distribute the remaining assets after their death. The person responsible for the management of the trust assets is the “Trustee.” Typically, the Settlor initially serves as Trustee, or may appoint another person, bank or trust company to serve as Trustee. The trust is “revocable” since the Settlor may modify or terminate the trust during his or her lifetime, as long as he or she is not incapacitated.
In order for the trust to work properly, the Settlor must “fund” it by transferring his or her assets (bank accounts, investments, real estate) into the trust. This requires changing the ownership of the assets to the trust, sometimes referred to as re-titling. Assets not properly transferred to the trust may be subject to probate. Not all assets should be titled in the trust, however, due to income tax issues.
During the Settlor’s lifetime, the Trustee invests and manages the trust property. Most trust agreements allow the Settlor to withdraw money or assets from the trust at any time, and in any amount. If the Settlor become incapacitated, the Trustee is authorized to continue to manage the trust assets, pay the Settlor’s bills, and make investment decisions. One of the advantages of a revocable trust is that it may avoid the need for a court-appointed guardian of a person’s property.
Upon the Settlor’s death, the Trustee or successor is responsible for paying all claims and taxes, and then distributing the assets to your beneficiaries in whatever way the Settlor put forth in the agreement. Serving as trustee involves significant responsibility. The prudent investment of trust assets is not a trustee’s only responsibility. The Trustee’s exact powers and duties will depend on the instructions in the trust agreement. But, in general, the Trustee will:
- Hold trust property
- Invest the trust assets
- Distribute trust income and/or principal to the beneficiaries
- Make tax decisions
- Keep records of all trust transactions
- Issue statements of account and tax reports to the trust beneficiaries
- Answer any questions you and the beneficiaries may have concerning the trust
A Trustee is a fiduciary and must follow a strict standard of care when performing trust functions. That is why is important to seek counsel when acting as a trustee—proper advice from an attorney avoids liability and issues down the road.