GTH Estate Planning Blog

As indicated earlier, the Trustor who establishes a Revocable Living Trust ordinarily serves as sole initial Trustee (as well as being sole beneficiary during his lifetime). That way, even though the Trustor gives title to his assets to the Living Trust, he retains sole control. If it is a couple establishing a Living Trust, then likewise the two of them usually start out as Co-Trustees.

Here, wealthy and elderly Nils has named nephew and CPA Lars as the Co-Trustee of Nils's Living Trust. Even though they are Co-Trustees with seemingly equal authority, their roles are radically different. Nils can really do anything he wants. He's accountable only to himself. If he makes a wrong move with his own money, who is going to sue him? He can take money out and waste it, or give it away. He can make dumb investments. The only person who can counter him is Lars, his Co-Trustee. And even then Nils could fire Lars as Co-Trustee, and amend the Revocable Living Trust to make himself (Nils) sole Trustee.

Lars on the other hand is a fiduciary, called upon to act responsibly with someone else's money. As we will see next week, this leads to an interesting contest between him and Nils.

Nils and nephew Lars are Co-Trustees of Nils's Revocable Living Trust. In that role they hold title to most of Nils's assets. Under statutory and common law and the written terms of the trust, they have authority over the assets pretty much the same as Nils would have if he owned the assets in his own name. It is a common misperception that if one puts an asset in a trust, then it can't be sold. That isn't so. In the trust Nils and Lars can sell and buy assets. They can also borrow money to help fund the assets of the trust. Sometimes a Trustor (the founder of a trust) restricts the power to borrow in the trust document, to reflect the Trustor's own philosophy of investing.

A trust agreement may give the Trustee the power to amend the trust itself. This might be limited to specific situations, for instance to conform to future tax requirements. A trust agreement might say the Trustee may modify the trust terms to accommodate the receipt of any stock in an S corporation, because only trusts with certain terms are qualified to own S corporation stock without serious tax problems. Or a Trustee might be authorized to amend in the event IRA or other retirement funds are received by the trust, since the terms of a trust affect the rate at which retirement funds must be withdrawn and taxed.

Avoiding the Court filing of a Will, by using a Living Trust as the primary instrument to allocate one's estate, doesn't just avoid probate costs. At the same time it gives privacy to one's wishes. Since his estate is large and allocated among his surviving spouse and a bunch of other relatives, Nils is glad to know that his designation of heirs will not be open to the public eye.

As noted earlier, Sylvia is legally entitled to be one of Nils's heirs when he dies. Under the Premarital Agreement, she gets the Washington house and a $2 million trust if Nils dies before she does (as is likely since she is younger). This obligation is reflected in Nils's Living Trust Agreement, before gifts to other heirs.

OK; let's get basic here. What is a Living Trust? It's a different way of doing one's Will and (eventually) transferring one's estate to heirs. It's partly a way of satisfying title companies.

If Nils had a Will and then died, Lars as Executor would file the Will, give certain required notices, Inventory the assets, pay the taxes and other costs, and finally transfer the assets to the heirs. The Will gives him the authority to do all this, but the world doesn't recognize his authority until he goes to Court, files the Will and the proper pleadings to start a probate, and is recognized by signature of the Judge or Commissioner there. The Will and Lars's appointment as Executor are then part of the public record. So when Lars signs and records a deed of Nils's residence to whomever has inherited it under the Will, or to someone who buys it from Nils's estate, title companies will see in the record not only the deed, but Lars's appointment as Executor, and willingly issue title insurance to the new owner.

A Living Trust is a different way of doing all this. Nils can sign a Living Trust Agreement that looks kind of like a Will. Then, if things are done right, Nils will transfer title to his assets to the Trustee of the Living Trust (now, while Nils is living). The Trustee thus has title. If Nils dies, the Trustee named in the Living Trust Agreement still has that title, and may transfer it to their heirs or sell it as part of the estate process. There is no Court filing, no probate. Avoiding the probate process can save estate costs, particularly with properties in certain states like California.