Source: https://www.fredtansill.com/articles/are-revocable-trusts-oversold/
Timestamp: 2019-03-25 11:53:23
Document Index: 658763998

Matched Legal Cases: ['§ 26', '§ 26', '§ 26', '§ 58', '§ 2620', '§ 26', '§ 11', '§5', '§ 55', '§ 330', '§ 156', '§ 55', '§ 64', '§ 64', '§1', '§3', '§19', '§ 64', '§ 64', '§ 64', '§ 74', '§ 74', '§ 64', '§ 64', '§ 64', '§ 20', '§ 15', '§ 64', '§ 64', '§6', '§6', '§6', '§26', '§11', '§301', '§671', '§1', '§1', '§301', '§1', '§ 1', '§1', '§1', '§1', '§1', '§1', '§1', '§58', '§2035', '§121', '§163', '§164', '§666', '§ 646', '§ 2041', '§1014', '§2041', '§1014', '§47', '§47', '§47', '§58']

U.S. and Offshore Asset Protection Strategies
16th Annual Sophisticated Trusts And Estate Law Institute New York State Bar Association
• Practical Non-Tax and Tax Considerations In The Use Of Revocable Inter
Vivos Trusts
The purpose of this article is twofold: (1) to reconsider the issue of "burdens of probate" and to review under the current state of the law in several jurisdictions how these burdens may be avoided even when assets pass under a will, without the benefit of a revocable trust; and (2) to cover succinctly many of the legal and tax issues relating to revocable trusts that are frequently more taken for granted than understood.
In his 1966 book How To Avoid Probate, Norman Dacey characterized the probate system as a conspiracy by the probate bar against the public. In an almost comical, if inadvertent, effort to prove Dacey's point, the New York County Lawyers Association filed suit to enjoin the sale and distribution of his book on the ground that Dacey was practicing law without a license. The Association also attempted to charge him with criminal contempt.
For better or worse, Dacey, a financial planner, popularized the revocable living trust and started a tide that 30 years later may finally have crested. This article seeks to highlight the continuing advantages of revocable trusts while noting the evolutionary changes in state law which render revocable trusts unnecessary, inappropriate, expensive and inconvenient for many people in many circumstances.
II. Under What Circumstances May Revocable Trusts Be Unnecessary?
Notwithstanding the enthusiasm we and our clients feel for the virtues and
benefits of revocable trusts, it is worthwhile to reflect upon and reconsider those circumstances in which it may NOT be appropriate to use a revocable trust.
A. Recent Changes in Virginia Law Have Reduced the Need for Revocable Trusts/Some General Considerations Regarding Revocable Trusts.
Court Accountings. Court accountings are generally considered the preeminent "burden of probate." In Virginia, in a court-supervised administration, the executor must submit to the court an accounting showing each item of income and each item of disbursement of the estate for the period of the accounting. Code of Virginia § 26-17. The total of the opening inventory of estate assets for the accounting period plus the income earned less the disbursements made for the period must balance with the assets remaining on hand at the close of the period. "Balancing" the account can be a challenge for the executor, because it is easy to miss an item of income or expense, particularly in a complex estate. The payor of income items and the payee and purpose of expense items must be identified. Back-up paperwork -- canceled checks, receipts, settlement statements, bank and brokerage statements, etc. -- must be meticulously maintained and filed with the court. This is very time-consuming. Clients are anxious to avoid court supervised accountings because they are a chore. Court-supervised accountings will be avoided as to assets held in a revocable trust at the client's death, and this is one of the strongest justifications cited for revocable trusts.
Statements in lieu of accounts. A Virginia lawyer tempted to recommend the use of a revocable trust for this reason should consider the fact that Virginia law permits executors to avoid filing accounts as to assets passing under will by filing a "statement in lieu of settlement of account" where all distributees of a decedent's estate or all residuary beneficiaries under a decedent's will are personal representatives of the estate, whether serving alone or serving with one or more others who are not distributees or residuary beneficiaries. Code of Virginia § 26-20.1. Such a "statement in lieu" recites that all known charges against the estate have been paid and that, after the time required by law, the residue of the estate has been delivered to the distributees or beneficiaries. In the case of a residuary beneficiary, the statement must be accompanied by proper vouchers showing satisfaction of all other bequests in the will. In effect, the statement in lieu of accounts is permitted because all interested parties -- all beneficiaries -- are fiduciaries, and there is no point in making them account on the public record to themselves.
Notice that in this situation an inventory of the estate passing under the will must still be filed (Code of Virginia § 26-12) and the probate tax assessed and paid thereon. Code of Virginia § 58.1-1711.
Prior to 1993, no more than three personal representatives could file a statement in lieu, but that limit has now been removed. Code of Virginia § 2620.1. If a decedent leaves his estate equally to his eight children, he may facilitate their eligibility to file a statement in lieu by naming all eight as co-executors. In many cases where outright disposition to residuary beneficiaries is contemplated, the accounting burden may be avoided even where assets pass under will if all residuary beneficiaries are named Co-Executors and a statement in lieu is filed.
Where all necessary parties to permit a statement in lieu have not been named as co-executors in the will, may all of the necessary beneficiaries cure that problem post mortem notwithstanding the will by proffering for qualification as co-executors all distributees or all residuary beneficiaries? Apparently the answer generally is yes and apparently fiduciary clerks in most counties of the Commonwealth will permit by unanimous consent all distributees or all residuary beneficiaries to qualify, at least where the number of proposed fiduciaries is not unreasonably large in the opinion of the clerk. If more than 3-5 persons are proposed to serve, the fiduciary clerk may resist on the grounds that such a large number is not practical. Technically those actually named in the will may be required to formally decline to qualify. However, the author believes it is the present practice of the fiduciary clerk in Fairfax County to refuse this accommodation, if not generally, then on a case-by-case basis based on factors that are unclear. In an intestacy, all necessary parties could qualify as co-administrators to qualify to file a statement in lieu, unless, in the opinion of the fiduciary clerk, the number is unworkably large.
On the other hand, where there must be a continuing testamentary trust, whether a marital (e.g., QTIP) trust, or a bypass trust, or a trust for children, or a generation-skipping trust, or a pour-over to a continuing revocable trust, a will which creates such a trust or trusts or pours over to such a trust must be subject to court accountings. Accordingly, where testamentary trusts are a necessary feature of the client's estate plan, probate accounts may be avoided only if the client places all assets intended for testamentary trust arrangements in a revocable inter vivos trust.
Post mortem trust accountings. Annual court-supervised trust accountings were required for trusts under will until 1993, and the avoidance of that requirement was often cited in Virginia to encourage the use of revocable trusts where testamentary trusts would be used. There may be a valid motivation to avoid years of court supervised trust accountings, notwithstanding the points made below, i.e., that accounts frequently are required in any event for fiduciary income tax returns and general trust administration. However, in 1993, new Virginia Code § 26-17.7 was enacted permitting a testator to explicitly waive in his will the requirement of post mortem trust accountings. Fairly this should be seen to mitigate the need for revocable trusts where post mortem trusts are required. However, as noted previously, court accountings of the probate estate until the trust has been fully funded cannot be avoided in this case without using a fully funded revocable trust.
Will accounts be prepared even if not required by law to be filed? While there are benefits of economy and confidentiality in not having to file accounts with the court, in most cases the account will have to be prepared in any event in order to effectively administer and settle the estate, for peace of mind of the beneficiaries or the trustee (a bank serving will prepare an account, a lawyer serving must prepare an account per Legal Ethics Opinion 1617) and for federal and state fiduciary income tax purposes.
Other "burdens of probate" may not be avoided by use of a revocable trust. What does "avoiding probate" mean? Avoiding filing inventories and especially accounts with the Court. But both may well have to be prepared in any event. And state and federal estate tax returns, state and federal fiduciary income tax returns, valuation of assets, appraisals, etc., will be required whether a revocable trust is used or not. Close consideration of the matter in many cases will reveal that avoidance of court-supervised probate accountings, whether in cases of assets passing under will by virtue of a statement in lieu of account or in cases of assets passing by revocable trust, is a relatively immaterial economy in the overall scheme of estate settlement, and may not, by itself, justify the use of revocable trusts. Court accountings may in some cases be avoided by structuring a will to permit the filing of a statement in lieu of accounts, but even if you cannot avoid filing court accountings, is that a big enough burden to make it prudent for the client to use a revocable trust? Maybe not.
Confidentiality. Frequently cited is the advantage of confidentiality for revocable trusts. Whereas wills and the inventories of assets passing under them are filed with the Circuit Court as a matter of public record, revocable trusts are not recorded in the courthouse and thus remain confidential, and no inventory is required to be filed in the court of assets passing under trusts. Where the estate is very substantial or where the dispositive pattern is unusual or controversial, or where the client is in some sense a celebrity, confidentiality may be a preeminent concern of the testator and may alone justify the use of a revocable trust. While Commissioners of Accounts will frequently insist that revocable trusts be "exhibited" to them, it is apparently the general practice not to require a copy of the revocable trust in the court file, so confidentiality is preserved. On the other hand, for the vast majority of clients there is not an iota of concern for confidentiality and no objection whatsoever if the estate plan and the nature and extent of assets are available on the public record. As attorneys we should make no assumptions but should consult with our clients and discuss the importance of confidentiality with them.
Planning for incapacity/revocable trust vs. general power of attorney. Revocable trusts are touted as a good vehicle to plan for incapacity, in that the settlor's trust assets will be managed after his incapacity with no disruption or court incapacity proceeding or court accountings. However, any advantage of a revocable trust over a general durable power of attorney in this regard may be ephemeral or marginal. A client using a will could grant a general power of attorney that would survive his incapacity and could even authorize the attorney-in-fact to establish a revocable trust on his behalf upon his incapacity. In such a case, the client's assets could be placed in a revocable trust by his attorney-in-fact in the event of incapacity. In that light, does a revocable trust really offer material advantages over a general power of attorney? One hears much anecdotal complaining about the difficulties of operating under a power of attorney and getting financial institutions and others to recognize the authority of the attorney-in-fact. But the author suspects that close scrutiny of these complaints would not reveal any serious or impossible-to-overcome problems in operating under a power of attorney.
As a result of numerous recent studies in Virginia which have shown that, in fact, it is embarrassingly easy for attorneys-in-fact to steal from and otherwise financially abuse their principals, and that, for good or bad, little scrutiny and few impediments exist for the authority of attorneys-in-fact, Virginia in 1996 adopted new legal procedures whereby attorneys-in-fact for incompetent parties may be compelled to account by certain interested parties. (Code of Va. §§ 11-9.1, 11-9.6 and 37.1 - 132.1.) This may be good or bad, depending on your perspective. Trustees under a revocable trust for an incompetent will only have to account to the court or to interested parties if the trust document requires, which it frequently does not. The client establishing a revocable trust may provide for scrutiny or confidentiality, as he prefers. The foregoing may cause one to query whether there is a real advantage for revocable trusts in dealing with incapacity.
Real Estate. Consider also that in Virginia real estate is typically not a probate asset. In the memorable phrase, "it drops like a rock through the estate," vesting at the moment of death in the legatee or other taker, subject only to divestment and being brought into the estate for sale if the estate is insolvent or if the executor is directed to sell the property or authorized to sell it and determines to do so. In the normal Virginia case, there is no work for the executor or probate counsel to "probate" real estate. Contrast this with real estate passing under will or by intestacy in Washington, D.C. or Maryland estates, under which laws the real estate vests in the executor. The real estate is treated in those jurisdictions as any other probate asset; the executor would be responsible for mortgage, rental, real estate taxes, insurance and to convey title to the ultimate beneficiaries by executor's deed at the conclusion of estate administration. As a result, Virginia probate enjoys an advantage over such other jurisdictions when considering the relative "burdens of probate," because real estate generally passes outside of the probate process in Virginia.
Summary. In summary, Virginia law and particularly statutory changes in Virginia in the last several years have facilitated the avoidance of court supervised accounts of assets passing under will and of trusts created under will and in many cases have reduced the advantages of or need for revocable trusts. Revocable trusts will still be desirable, however, in the following circumstances:
Where the need for confidentiality of the estate plan and/or of the nature and extent of the assets is paramount. This will generally be in larger, more complex estates, where the dispositive pattern is unusual or controversial in some sense, or where the client is a celebrity.
Where the imminence of incapacity or death is greatest -- among
Where there is no spouse (many of the advantages of revocable trusts are less compelling when there is a spouse who may hold survivorship joint property and exercise a general power of attorney).
B. Recent Changes in D.C. Law Have Reduced the Need for Revocable Trusts.
Effective July 1, 1996, D.C. adopted a new probate act based on the Uniform Probate Code. Adoption of the new law was sponsored and lobbied hard by the American Association of Retired Persons -- "AARP." The new law provides that probate generally will be unsupervised unless an interested party e.g., a beneficiary or creditor -- wants it to be supervised. D.C. Code Title 20 in general; 20-406, 20-501 et seq. Accordingly, revocable trusts are no longer required to avoid probate in D.C. There will be no court-supervised probate for assets passing by will unless an heir or creditor or other "interested party" insists.
Moreover, confidentiality of revocable trusts has long been problematic in D.C., as the Register of Wills office has long made it a practice to insist that a copy of a decedent's revocable trust be placed in the court file of his or her estate. There is no statutory authority for the Register's position, but the practice has been rather uniform. Recently the law firm of Arnold & Porter, in order to protect the confidentiality of a client's revocable trust, challenged this practice on the part of the Register of Wills, and obtained an order from the Superior Court, Judge Christian, rescinding the requirement to file the revocable trust in that case. (In re Estate of Carolyn E. Agger, Admin. No. 2202-97, February 7, 1997). It is not clear whether the policy of the Register and the Court to require the filing of the revocable trust in probate cases will change as a result of this recent order.
An interesting nuance in D.C. law and practice under the new statutory regime is that where the trustees of the revocable trust are exactly identical to the personal representatives of the settlor's estate, the Register's office interprets D.C. Code Section 20-101(g) to include beneficiaries of the revocable trust as "interested parties" who must be listed on the petition for probate, although no copy of the trust must be filed. This was a requirement before the 1996 probate reform and was not changed by the new act.
In D.C. there appears to be a much reduced need for revocable trusts in general, but they may still be justified on grounds of confidentiality -- particularly if the Register of Wills' practice of requiring a copy of the trust in the public records is not reversed -- or where family acrimony is anticipated so unsupervised probate by unanimous consent is unlikely.
C. Recent Changes in Maryland Law Have Reduced the Need for Revocable Trusts.
Effective for decedents dying after October 1, 1997, Maryland has made changes to its probate law that will eliminate the need to file with the court inventories and accounts for certain qualified estates. Code of Maryland, Estates and Trusts Volume, §5-701 et seq. This new probate procedure is called "modified administration," and if an estate qualifies for modified administration and it is elected, there will be no requirement for filing an inventory or account, or unless requested by an "interested person," to give an accounting to an interested person.
Modified administration is available if --
(1) The residuary "legatees" (in a testate estate) or the heirs (in an intestate estate) fall within one or more of the following classes:
surviving spouse of decedent
Note: specific or cash bequests to individuals or entities outside of the permitted class will not preclude modified administration. The term "legatee" includes the trustee but not the beneficiary of an interest under the trust. Therefore, if a trustee of a residuary trust or revocable trust to which the residue of the estate passing under the will pours over is the personal representative, spouse or child of the decedent, modified administration may be elected, regardless of the identity of the beneficiaries of the trust.
(2) The estate must be solvent.
(3) Written consent must be obtained from the residuary legatees or heirs, as provided in Code of Maryland, Estates and Trusts Volume, Section 5-706.
(4) A "final report" on which inheritance tax is based and calculated must be filed by the personal representative within 10 months of appointment.
(5) Final distribution must be possible and completed within one year from the date of appointment.
(6) The personal representative's election of modified administration must be filed within three months from the appointment.
(7) On request, an interested person must be given a copy of a formal inventory or account.
Modified Administration will be revoked if an interested person files an objection, even after initially consenting. It will also be revoked if the personal representatives fail to meet the required deadlines. And for good cause shown, the court on its own initiative may revoke modified administration. If the procedure is revoked, the Register of Wills will send notice to all interested persons, and the personal representative must thereafter follow standard probate procedures.
As a result of these recent changes, in Maryland there will be many common circumstances in which full, formal probate may be avoided without the need to use a revocable trust.
D. Final Thoughts on Wills vs. Revocable Trusts.
To some degree the author feels embarrassed to be "defending" wills. The analysis and conclusions in this article should not be construed to reflect that the author longs for the "good old days" when
all clients went through probate
their lawyers were named as executors
the lawyers did all of the probate work, even the executor's job
if a family member was named
probate lawyers collected 10% of the probate estate to the second decimal point as our fee for our services without submitting itemized time charges or other justification for that level of fee.
The author's wife's family has twice been burned by "old fashioned probate lawyers" in Pennsylvania, who
- insisted that the only arrangement they would accept would be 10% of the probate estate, and they refused to submit itemized time charges,
- refused to "unbundle" services and charge hourly,
- would not "permit" family executors to do any of the probate work.
The bad old days in D.C. disappeared with the 1981 Probate Reform Act requirement of Court approval of fees. The author hopes with less court scrutiny in the District of Columbia after the probate law simplification D.C. lawyers will not go back to those old fee practices. In general the author believes that itemized time charges are the only fair way to bill for probate work.
However, the author believes that the pendulum may have swung too far towards revocable trusts, particularly in light of recent changes in the law. The author is concerned that the pattern of and full ramifications of statutory changes ameliorating probate for assets passing under will may not have been noticed by the bar and the public, because the changes have occurred over several years at a time when, as a profession, we were under more and more pressure to "do the right thing" and give people revocable trusts.
Some rethinking may be appropriate. We should not be embarrassed or ashamed to suggest that wills alone are appropriate as long as we accept and explain that we take for granted that probate counsel and the executor will take all steps necessary to avoid probate. However, with this new approach we must recognize that there is a risk that the probate lawyer or executor or family will not cooperate in the avoidance of probate after the client dies, and point out this potential hazard to our client.
At least this truism may be recognized: revocable trusts are more desirable for older, single, wealthy, confidentiality-concerned clients. Revocable trusts are less necessary for younger, married, less wealthy clients.
III. Practical Issues Requiring Special Consideration in the Use of Revocable Trusts.
A. Non-Tax Issues
1. Agreement or Declaration/Choice of Initial and Successor Trustees.
The classic Dacey trust is a "self-settled" trust: the settlor is also sole trustee and executes the trust in both capacities. Such a trust document is properly headed as a Declaration of Trust. This is a particularly appropriate format for younger, healthy, single and/or "independent" parties (i.e., married persons with children of a prior marriage).
In contrast, a Trust Agreement finds some party or parties other than the Settlor as trustee from the inception. The Settlor may or may not be a co-trustee.
There is no right or wrong way to handle the appointment of initial trustees except that to fail to consider the issue carefully based on the facts and circumstances of the case is a mistake.
The author's experience has taught him that one-marriage couples in strong, long-term marriages like to be co-trustees of each other's trusts from the inception, with the settlor succeeded at death or incapacity by an independent party -- e.g., a bank -- who will serve thereafter as co-trustee with the spouse. In such an arrangement the non-settlor spouse will typically be succeeded by one or more children as co-trustees, with discretionary distributions to the spouse or children reserved to the independent trustee. Likewise, elderly and especially single settlors with positive relationships with mature, capable children like to be co-trustees from the start with one or more children, with the settlor succeeded at death or incapacity by an independent trustee if the trust is to continue, i.e., in the case of generation-skipping trusts.
Code of Virginia § 55-7.1 provides that the doctrine of merger shall not apply to inter vivos trusts of which a trustee, whether settlor or not, is a beneficiary and has the power to revoke or appoint. Such a trust is for all purposes a valid trust.
2. Removal of Trustees.
Of course, the settlor, while competent, should be able to remove any trustee serving. After the settlor's death or incapacity, should the settlor's spouse be able to remove any trustee? After both have died, should the settlor's children be permitted to remove any trustee serving? For any reason or no reason or only for cause? How should cause be defined? With whom must a removed trustee be replaced? Only an "independent" trustee if none is serving? Only a trust company or bank? Or an attorney? These are all important and difficult decisions. In the author's opinion, the trustee removal and replacement provisions are among those more carefully scrutinized and agonized over by clients. These provisions require close attention by the drafting attorney and must be tailored to the client's preferences and family circumstances. Generally speaking, the author believes it is usually desirable to give responsible family members the power to discharge independent trustees, while requiring that any discharged independent trustees must be replaced with other independent trustees.
3. Definition of Incapacity.
It is essential that the trust contain a clear, easily-interpreted definition of the settlor's incapacity with which the settlor is comfortable. That incapacity will cause the trust to become irrevocable. Settlors naturally have great anxiety on this topic. A sample clause is attached as EXHIBIT A.
4. Power to Revoke Should be Explicit.
Absent a reserved power to revoke, a trust normally cannot be revoked. (Restatement (Second) of Trusts § 330.)
5. Explanatory Memorandum.
Clients will frequently forget within weeks, months or years why they executed a revocable trust, what happens upon their incapacity, how to transfer assets into the trust, what is the income and estate tax treatment of the trust. Anticipating this future confusion, lawyers are well advised to prepare a standard memorandum form which, with a few customized variations, they deliver with each revocable trust, so that clients may refer to these memoranda in the future to refresh their understanding of the purposes, operation and tax implications of the revocable trust.
The specific wording to use in transferring assets into trust name should be highlighted and emphasized, as this is inevitably a recurring issue. A sample memorandum is attached as EXHIBIT B.
The author also sends a cover letter with documents he has drafted which explains the purpose and effect of the documents and summarizes them.
6. Transferring Tangibles Into the Trust.
Tangibles which have titles -- automobiles and boats -- must be titled on the official governmental records in trust name to effect a transfer. Untitled tangibles may be put in trust name for purposes of avoiding probate by use of a Deed of Gift. A sample form is attached as EXHIBIT C.
7. Are Assets Held in a Revocable Trust Protected from Claims of the Settlor's Creditors?
NO. If the settlor is a permissible beneficiary, his creditors may reach the maximum amount the trustee could pay to him or apply for his benefit. Restatement (Second) of Trusts, § 156(2). Petty v. Moores Brook Sanitarium, 110 Va. 815; In re O'Brien, 50 Bankr. 67 (Bankr. E.D. Va. 1985).
Code of Virginia § 55-19 provides as follows:
A. Except as otherwise provided in this section, all trust estates shall be subject to the debts and charges of the persons who are the beneficiaries of such trusts.
B. [exception for spendthrift trusts to $600,000] . . . However, no such trust shall operate to the prejudice of any existing creditor of the creator of the trust . . .
C. If the creator of a trust is also a beneficiary of the trust and the creator's interest is held upon condition that it is not subject to the creator's liabilities or to alienation by the creator, such condition is invalid against creditors and transferees of the creator . . .
8. Are Assets Held in a Revocable Trust Protected from Claims of the Settlor's Spouse for a Statutory Share at Death?
Not in Virginia. Generally yes in D.C. and maybe not Maryland.
Prior to the adoption of Virginia's Augmented Estate Statute (Code of Virginia § 64.1-16, 16.1) in 1990, revocable trusts were used to defeat spousal claims for a one-third statutory share. The statutory share of a surviving spouse was enforceable against probate assets only, and could easily be defeated by removing assets from the probate estate and putting them in a revocable trust. This technique continues to be available and effective to defeat spousal forced statutory shares at death in Maryland and in the District of Columbia. Under the Augmented Estate statute in Virginia, transfers to revocable trusts during marriage are brought back into the hotchpot -- the augmented estate -- upon which the spouse's one-third enforceable interest is calculated. Code of Virginia § 64.1-16.1.3.
The general rule in Maryland is expressed in the Code of Maryland, Estates and Trusts Volume, §1-101(g), which defines property subject to the elective share of a surviving spouse as excluding property which passes at death to another by the terms of an instrument. See also Estates and Trusts §3-203. But in Knell v. Price, 569 A.2d 636 (1990), the Court of Appeals of Maryland held that a deed from husband's attorney to husband creating a life estate in husband, denominating husband as "trustee," with a remainder to his long term paramour, did not remove the property from his estate subject to the elective share of the wife from whom he had been separated for almost 30 years at his death. The Court based its conclusion on its view that because the husband retained control of the assets conveyed, the conveyance worked a fraud on marital rights. There is no doubt that the logic of this opinion could be applied to find assets held in a revocable trust subject to the surviving spouse's elective share, but to the best of our knowledge, no case has so held. And can we be certain the Maryland courts would so hold if, for instance, the husband established in his revocable trust QTIP and/or credit shelter trusts with his wife as beneficiary?
In D.C. the statutory share is claimed against the net estate bequeathed and devised under the Will of the decedent, plus any "improper" inter vivos transfers. D.C. Code §19-113(e). So the issue is whether transfers to a revocable trust were "proper." See Windsor v. Leonard, 475 F2d 932 (D.C. Cir. 1973).
9. Joint Revocable Trusts.
A joint revocable trust of which both husband and wife are settlors, providing the estate plan for both as to the joint assets in the trust, is frequently used in community property jurisdictions. Community property, including property held in such a joint trust, receives a unique tax benefit on the death of the first spouse to die: all community property (rather than one-half of joint spousal property as in non-community property jurisdictions such as D.C., Maryland and Virginia) receives a tax-free step up in income tax basis. While such trusts are unquestionably valid, great care must be taken in the preparation of such a trust to delineate the rights of each spouse to amend or revoke the trust, both during their joint lives and after the death of the first spouse to die.
The author strongly recommends against the use of joint revocable trusts in D.C., Maryland and Virginia. The few he has ever seen have all ended up in litigation. It should be taken as a given that the surviving spouse will want to amend or revoke the trust in defiance of the understanding and expectation of the predeceasing spouse, probably in defiance of the terms of the trust, and will sue the lawyer if the surviving spouse cannot change it. If the surviving spouse thinks he or she may change the joint trust and tries to, the deceased spouse's family will sue the surviving spouse and the lawyer who drafted the trust.
10. Execution of Trusts, Coordination with Pour-Over Will.
All states have adopted either the Uniform Testamentary Additions to Trust Act or similar statutes, recognizing the validity of devises and bequests of probate assets under will to inter vivos trusts and setting out the rules for such pourovers. Before the enactment of these statutes, unfunded trusts and those that were amended after the effective date of the will raised troublesome issues. (Berall, Campfield & Zaritsky, 468-2d T.M. Revocable Inter Vivos Trusts, p. A-28.) In Virginia see Code of Virginia § 64.1-73. Where the trust to which the will allegedly pours over is not in existence on the date the will is executed, the disposition may be problematic. (An argument could be made that the trust is a testamentary disposition which must therefore be executed with the formalities of a will. See Code of Virginia § 64.1-45.)
Under § 64.1-73 A.1, the trust to which the will pours over must be identified in the will and the trust must be executed "before or concurrently with the execution of the testator's will."
There is no legal requirement that the signatures of the settlor and trustee(s) be witnessed or notarized, but both are recommended for evidentiary purposes, to forestall a claim, to which a declaration of trust is particularly susceptible, that the trust had not actually been established as of a relevant date and may have been back-dated.
11. Funding of Revocable Trust.
At common law, every trust had to be created with some property held by the trustee. (Restatement (Second) of Trusts, § 74; I Scott on Trusts, § 74.) However, as noted above, all states and the District of Columbia have adopted the Uniform Testamentary Additions to Trusts Act or comparable legislation under which a trust is valid "regardless of the existence, size or character of the corpus." In Virginia see Code of Virginia § 64.1-73.B. which provides re wills pouring over to trusts, "the vivos trust may be an unfunded trust." For purposes of this statute, an inter vivos trust is deemed established upon execution without regard to funding. Code of Virginia § 64.1-73.B. 1. Thus, not even nominal corpus is required. Nevertheless, the author believes that it is prudent to avoid any doubt or contest to clearly fund the trust at execution, e.g., by attaching a one dollar ($1.00) bill to it, so that it is clear that the trust has been executed and funded before or concurrently with the execution of the will pouring over to it.
12. Fiduciary Powers.
It is virtually always wise in a revocable trust to incorporate by express reference the statutory fiduciary powers set out in Code
of Virginia § 64.1-57 and D.C. Code § 20-741, which may be granted to a trustee as well as to an executor. The fiduciary powers set out in the Maryland Code, Trusts and Estates Volume § 15-102, are automatically accorded to trustees unless otherwise limited in the trust.
13. Choice of Fiduciaries.
There are restrictions under Virginia law on the domicile of trustees of a trust to which a Virginia estate under will may pour over. Under the 1996 amendment to Code of Virginia § 64.1-73, at the time the devise or bequest is to be distributed to the trustee or trustees, at least one trustee shall be (i) an individual (who may be resident or non-resident, regardless of the relationship to a decedent), or (ii) a corporation or association authorized to do a trust business in Virginia. Non-resident individuals must appoint the local clerk of the circuit court as agent for service of process, and bond with surety shall be required in every case unless at least one other trustee is a resident. Corporations or associations not qualified to do trust business in Virginia may not serve as trustee of such a trust. Code of Virginia § 64.1-73A.2. Notwithstanding the statute, the author is aware of cases in which Virginia courts have approved pour-overs to non-resident corporate trustees of inter vivos trusts where there is no Virginia nexus, i.e., all beneficiaries are out of state and consent. Notice that non-resident individual trustees no longer need to be relatives of the decedent, as was formerly required.
There are no restrictions under D.C. or Maryland law on the domicile of trustees.
14. Bank "Trust" Accounts/Totten Trusts.
Code of Virginia §6.1-125.1.14 defines a "Trust Account" as follows:
"an account in the name of one or more parties as trustee for one or more beneficiaries where the relationship is established by the form of the account and the deposit agreement with the financial institution and there is no subject of the trust other than the sums on deposit in the account; it is not essential that payment to the beneficiary be mentioned in the deposit agreement. A trust account does not include a regular trust account under a testamentary trust or a trust agreement which has significance apart from the account, or a fiduciary account arising from a fiduciary relation such as attorney-client." In other states these "bank account trusts," where there is no trust document, but merely a bank account in the name of " as trustee(s) for " are known as "Totten Trusts."
Under §6.1-125.3.C.,
"Unless a contrary intent is manifested by the terms of the account or the deposit agreement or there is other clear and convincing evidence of an irrevocable trust, a trust account [as defined above] belongs beneficially and absolutely to the trustee during his lifetime... "
So this is a form of revocable trust. It is like a pay-on-death ("P.O.D.") account.
On the death of the sole or survivor trustee, sums remaining on deposit belong to the beneficiary. (§6.1-125.5.C.2.) The law is the same in D.C. (§26-204).
15. Coordination with Durable General Power of Attorney ("GPA").
Where a revocable trust is used, it is desirable to coordinate it with the client's durable GPA.
The GPA should authorize the attorney-in-fact to contribute assets to the revocable trust, so that in the event of the client's incapacity, an unfunded trust may be funded and administered for his benefit during his incapacity. See EXHIBIT D for a sample form clause.
No power should be granted to the attorney-in-fact to revoke a revocable trust unless the client has carefully considered the issue.
The attorney-in-fact should be authorized as the client wishes to make gifts on the client's behalf. See Gifts from Revocable Trusts below. Consideration should be given to:
whether all members of a class of donees must be treated
whether annual gifts should be capped, e.g., by the annual
No potential donee should be permitted or authorized to make gifts to himself.
If a child is to serve as attorney-in-fact or successor, and the client wants to provide for potential gifts to that child, consideration may be given to using in the GPA a clause along the lines of the one proposed in EXHIBIT E authorizing an independent third party to make gifts to such child. Frequently a client wants a child to serve as attorney-in-fact but the client does not want that role to preclude the child from receiving gifts under the power of attorney.
Where the client elects not to use a revocable trust, he may still authorize his attorney-in-fact under his GPA to create a revocable trust on his behalf. See Exhibit F for a sample form clause.
16. Application of the Rule Against Perpetuities.
The period of the rule against perpetuities begins on the date the revocable trust becomes irrevocable, i.e., on the death or permanent incapacity of the settlor.
A settlor of a revocable trust has some freedom of choice in the selection of the applicable rule against perpetuities. For instance, Delaware and Alaska and most recently Maryland have permitted perpetual trusts to be established not limited in duration by the rule against perpetuities, as have several other states. (In Maryland the new statute is effective October 1, 1998, and permits a trust to expressly waive the normal rule against perpetuities. See Code of Maryland, Estates and Trusts Volume, §11-102(e)). In these states trusts may be established for a literally unlimited duration. This stands in contrast to the much more typical common law perpetuities limit of 21-years-after-the-death-of-a-life-in-being-at-the-commencement-of-the-trust. But recitations in the trust of Delaware law as applicable law may not be effective without some substantial Delaware nexus, for instance Delaware trustee domicile, Delaware sitused assets, Delaware bank trustee, Delaware situs of trust administration.
17. Advantages of Revocable Trusts.
Avoids probate tax in Virginia (this tax (.1%) is relatively nominal except in very large estates).
Management of Settlor's Property. If Settlor is not capable or interested in management or does not have time, or if the Settlor wants to "audition" post-incapacity or post mortem arrangements.
To Avoid Probate and Public Disclosure. Yes, but see analysis under local law at the beginning hereof. To avoid ancillary administration in situs of real estate outside of state of domicile.
To Minimize Probate Legal Fees. Yes, but see analysis under local law at the beginning hereof. Regarding legal fees, of course, an individual executor may handle inventory and accounting functions on her own if she is reasonably diligent and competent, and many of our clients are willing and even anxious to perform these tasks, merely asking us as probate counsel to review their inventories and accounts. Most lawyers prudently and efficiently assign these inventory and accounting tasks to paralegals in the event that the individual executor asks the probate counsel to handle them, because they really do not require the practice of law. In fact, in the typical probate estate there is usually rather little, and frequently no requirement of true probate legal services. There is tax work that a tax lawyer or tax accountant almost always must perform, and inventories and accounts, which a paralegal, accountant, or layman can perform. If a client chooses as executor a competent family member who will not charge a fee, there may be little or no probate legal fees required to probate the will. In many cases the only real work will be tax work for a tax lawyer or tax accountant. The probate case that requires substantial real legal work is comparatively rare.
However, the advice of a probate attorney can be crucial to
take advantage of post-mortem tax planning and probate avoidance techniques.
Snob Appeal. Many wealthy sophisticated clients now expect and want a revocable trust as a status symbol if not for any persuasive practical reason. Estate planning attorneys face a Hobson's choice in this regard. If we do not recommend a revocable trust, we may be viewed by the client or by the client's other financial advisors as either unsophisticated, or, worse, as cynical for "tricking" the client into probate. On the other hand, as noted, revocable trusts may provide little or no real benefit in many situations.
Motivates Elderly to Organize and Consolidate Their Assets. The loose ends of a lifetime can be tidied up before death.
Avoids Reliance on Post Mortem Elections to Avoid Probate. A number of the techniques for avoiding probate without using a revocable trust which are described herein require a knowledgeable, motivated, willing probate lawyer who will advise the executor of the opportunity to avoid probate by post mortem planning. Even if the drafting attorney contemplates the elections, that attorney may not be the probate attorney consulted by the executor, or the executor or family members may not want to avoid probate.
18. Advantages of Probate.
Before your clients rush to the conclusion that it is desirable to avoid probate, they should consider the value to them of the advantages legislatures and courts have seen in probate:
Court supervision of administration of assets, of investments, of expenditures and distribution in accordance with the terms of the will, e.g., where the family is estranged.
Court supervision and approval of fiduciary and legal fees, where the family does not trust the probate lawyer or executor to bill fairly.
Notice to interested parties of qualification of fiduciaries and ability of interested parties to monitor the process.
B. Tax Issues
19. Tax Reporting.
Even grantor trusts must have their own tax identification numbers and must file income tax returns, although all of the items of income, deduction, and credit are included in the computation of the settlor's personal income tax liabilities, and the return is relatively simple for the trust. The new IRS tax reporting rules for grantor trusts promulgated December 20, 1995 are summarized in Berall, Campfield & Zaritsky, 468-2d T.M., Revocable Inter Vivos Trusts, on C & A
pp. 1-2 as follows:
"Special exceptions to the fiduciary return filing and trust identification number requirements exist, however, for certain grantor trusts. Regs.
§301.6109-1(a)(2) provides that a taxpayer identification number need not be obtained for a trust that is taxable to a single individual as a grantor trust under §§671-679 if the Regs. §1.671-4(b)(2)(I)(A) alternative reporting method is used. Under this method, the trustee furnishes the taxpayer identification number of the person taxable as the trust owner to the payors and the trust owner reports the income on his or her individual tax return; no fiduciary return is filed. If the grantor is a trustee or co-trustee, the trustee has no further reporting obligation. However, if the grantor is not a trustee or co-trustee, the trustee must furnish the grantor with a statement that: (1) shows all items of income, deduction, and credit for the trust for the taxable year; (2) identifies the payor of each income item; (3) provides the grantor with the information necessary to take the items into account in preparing his or her return; and (4) in that the items shown on the statement must be included in computing the grantor's taxable income on his or her return. If a revocable trust is taxable to a husband and wife who file a joint income tax return, the spouses may use this method. An identification number must be obtained for the trust, however, for the first taxable year in which the trust is not treated as taxable to a single individual (or spouses filing a joint return) or the trustee chooses not to report under the Regs. §1.671-4(b)(2)(I)(A) method. Regs. §301.6109-1(a)(2).
Moreover, no fiduciary income tax return need be filed if the trustee reports under Regs. §1.671-4(b)(2)(I)(B), but a taxpayer identification number must be obtained for the trust. Under this method, the trustee furnishes the trust's taxpayer identification number to the payors and then reports the income to the IRS showing the trust as the payor and the grantor as the payee. If the grantor is not a trustee or co-trustee, the trustee must furnish the grantor with a statement that: (1) shows all items of income, deduction, and credit for the trust for the taxable year; (2) provides the grantor with the information necessary to take the items into account in preparing his or her return; and (3) informs the grantor that the items shown on the statement must be included in computing the grantor's taxable income on his or her return. This method may be used if a revocable trust is taxable to a husband and wife who file a joint income tax return. Regs. § 1.671-4(b)(3) provides a comparable reporting method for a trust that is taxable to two or more grantors who do not file a joint return. A fiduciary income tax return must be filed if the grantor (or the grantor's spouse if they are both taxable as grantors) is not a United States person or if the trust has its situs or any of its assets located outside of the United States.
The Regs. §1.671-4(b) reporting methods are available for taxable years beginning after 1995. A transition rule, Regs. §1.671-4(h)(2), provides that for earlier years the IRS will not challenge the method of reporting of the trustee of a grantor trust who did not comply with Regs. §1.671-4(a) (i.e., file a fiduciary income tax return with statement attached) if the trustee reported in a manner substantially similar to one of the methods under Regs. §1.671-4(b). A trustee who previously filed a fiduciary income tax return may file a final fiduciary return and begin reporting under an alternate method. Regs. §1.671-4(g) describes the procedure. Regs. §1.671-4(g) also allows a trustee to change from one alternate method to another and to change from an alternate method to filing a fiduciary income tax return."
20. Transfer Tax on Transfers of Realty to Revocable Trust.
Apparently there is no material transfer tax in any jurisdiction of the U.S. on transfers to revocable trusts. D.C. was said to be the last non-conforming jurisdiction until it exempted such transfers from tax in 1992. Virginia's Attorney General temporarily created some uncertainty on the exemption for such transfers in the commonwealth until the General Assembly clarified the situation with a specific statutory exemption in 1995. See Code of Virginia §58.1-811(A)(12).
21. Transfer of Qualified Plan Benefits to Trust as Beneficiary.
Payment of qualified plan benefits or an IRA to a trust can accelerate tax on the deferred income unless the trust qualifies as a "designated beneficiary" within the meaning of the IRS regulations. A QTIP trust can qualify as a designated beneficiary and naming a QTIP trust can be desirable under some circumstances, e.g., if the surviving spouse is not the parent of all of the decedent's children. The handling of this is quite tricky and technical. Keep in mind that under the Retirement Equity Act of 1984, the surviving spouse has an absolute right to be named outright beneficiary of the deceased spouse's qualified plan benefits. This right may be waived. Because of the unique rollover benefits available to a surviving spouse, it is often desirable to name the spouse as beneficiary of retirement assets.
22. Transfer of Life Insurance to Trust as Beneficiary.
Such a designation will keep the insurance proceeds out of probate and may be appropriate in order to fund the unified credit share, to QTIP the benefits or defer distribution until children have attained maturity. Where a trust is appropriate for the insurance benefits, an irrevocable trust is frequently called for as owner and beneficiary to keep the insurance proceeds out of the taxable estates of the insured, of the insured's spouse, and possibly of the insured's children in a generation-skipping irrevocable trust.
23. Gifts from Revocable Trusts Within Three Years of Death.
Until recently the IRS took the position that gifts from a revocable trust within three years of the settlor's death were includible in the settlor's estate. However, this is no longer a concern in light of the enactment of IRC §2035(a), which provides that transfers from a revocable trust are treated just like transfers made directly by the settlor.
24. Real Estate Income Tax Benefits.
The income tax benefits accorded to principal residences under I.R.C. §§121 (exclusion of gain), 1033 (involuntary conversion), are available for real estate held in a revocable trust. Also the home mortgage interest deductions (§163) and the real estate tax deduction (§164) are available for homes held in a revocable trust.
Why might real estate be put in a revocable trust? To avoid ancillary probate in another jurisdiction than that in which the testator is domiciled, e.g., for vacation homes in Aspen, Hilton Head or Martha's Vineyard, to avoid probate of this realty in Colorado, South Carolina or Massachusetts.
25. Income Tax Treatment After Death.
At one time estates enjoyed various income tax advantages over revocable trusts after the decedent's death, including the following: (1) estates could adopt a fiscal year whereas trusts were required to use a calendar year; and (2) trusts were subject to the IRC §666 throwback rues whereas estates were not. However IRC § 646, which applies to estates of decedents dying after August 5, 1997, eliminates most of these disparities by allowing revocable trusts to be treated and taxed as part of an estate if the proper election is made by the executor and trustee.
26. Tax Basis Revocable Trust.
Community Property receives a 100% step-up in basis on the death of the first spouse to die. See 9, supra. Residents of non-community property law jurisdictions have started to try to obtain identical tax treatment for joint assets by conveying it to a joint spousal revocable trust in which either spouse has the power to revoke the trust while both are alive, in which case an undivided one-half interest in the trust property would be distributed to each settlor free of trust.
In TAM 9308002, the reasoning of which has been criticized by Howard Zaritsky in TM Portfolio # 468-2d, at C & A pp. 2-3, the IRS refused to grant a full step-up in basis for all revocable trust assets to the surviving spouse where the trust was created within one year of death and the surviving spouse had the power to revoke the trust during the settlors' joint lifetimes, in which case an undivided one-half interest in the trust property would have been distributed to each settlor, free of trust. The tax issue is explained in Berall, Campfield & Zaritsky, 468-2d TM, Revocable Inter-Vivos Trusts as follows:
"In TAM 9308002, a domiciliary of a common-law state and her surviving spouse created an inter vivos trust for their own benefit one month before her death. For the most part, the settlors transferred to the trust property they held as joint tenants. Neither settlor exercised the power to revoke the trust. The trust provided that, at the death of the first settlor to die, the decedent-settlor's one-half interest in the property of the trust passed to the surviving settlor. In addition, the decedent-settlor had a general lifetime power of appointment over the property of the trust. At the time of the decedent settlor's death, the power to appoint had not been exercised. The National Office advised that the surviving settlor's one-half undivided interest in the trust property, includible in the decedent-settlor's gross estate by virtue of § 2041, did not get a step-up in basis. The National Office reasoned that the donor, i.e., the surviving settlor, had dominion and control over the property through the year before the decedent settlor's death, since he could revoke the trust at any time. It was only at the decedent-settlor's death that this power became ineffective. Because the surviving settlor never relinquished dominion and control over the property and the property reverted to him at the decedent-settlor's death, reasoned the National Office, the property was not acquired from the decedent-settlor under §1014(a) and (e), notwithstanding that it was included in the decedent's gross estate under §2041. Denying the basis step-up, the National Office concluded that the property was subject to §1014 (e) .... This TAM defeated a step-up in basis through the use of a joint revocable trust at the first spouse's death. and the IRS may extend its reasoning to defeat a step-up for the property held in trusts created more than one year before the first spouse's death."
For a more complete discussion, see "Estate Planning Solutions to The Problem of Highly Appreciated Stocks" by Howard Zaritsky, pp. 28 et seq., delivered at the 1996 Southeastern Regional Meeting of the American College of Trust and Estate Counsel, and "Can You Use a Tax Basis Revocable Trust?" by Paul M. Fletcher in The Practical Lawyer, Summer 1994 Issue at p. 60.
27. Coordination of Tax Apportionment Between Will and Trust.
The provisions of a pour-over will and of the revocable trust into which it pours must be carefully coordinated as to payment of debts, expenses and taxes. The executor should be authorized to obtain needed liquidity from the trustee, and the trustee should be directed to provide the same.
28. Local Authority to Tax Income of a Trust.
According to D.C. Code
§47-1809.1, if the creator of a trust was at the time the trust was created domiciled within D.C., the trust is a resident trust. This suggests that if a D.C. resident establishes a lifetime revocable trust and during his life or at or after his death an out-of-state fiduciary, e.g., non-resident bank, becomes trustee, the trust is nevertheless resident in D.C. for the income tax purposes. Forever. The only test for trust residency for D.C. tax purposes in the D.C. statute is residency of the settlor at the time the trust was created. Query whether this makes sense, or could be legal, if all other indicia of trust domicile are outside of D.C., e.g., after the settlor has died, the trust is administered in California by a San Francisco bank for the benefit of California beneficiaries with no D.C. assets or other nexus? §47-1809.2 of the D.C. Code expressly provides that "the residence or situs of the fiduciary shall not control the classification of estates and trusts as resident or nonresident under the provisions of §47-1809.1." (Emphasis added) In D.C. the tax rates applicable to individuals apply to trusts, i.e.:
< $10,000 --- 6% of taxable income
$10,000-$20,000 --- $600 plus 8% of the excess over $10,000
> $20,000 --- $1,400 plus 9.5% of the excess over $20,000
In Code of Virginia §58.1-302 a resident trust for tax purposes is defined as either:
a trust created by a person domiciled in Virginia; or
a trust being administered in Virginia.
If a D.C. resident during his life establishes a revocable trust with a Virginia trust company administered in Virginia, it appears that after the settlor's death both Virginia and D.C. could assert income tax authority over the trust.
1.(a) If I Become Incapable of Managing My Own Affairs. My Trustee serving (other than myself, if I am serving), or if I alone am serving, my successor Trustee nominated herein, may determine in its reasonable discretion at any time whether I have become incapable of managing my own affairs. If such determination that I am incapable of managing my own affairs shall be challenged by myself or any beneficiary or remainder beneficiary hereunder, such party may conclusively confirm its determination that I am incapable of managing my own affairs by obtaining any of the following, and in such event its determination may not be further challenged:
(i) A court order which, in the opinion of my Trustee serving (other than myself, if I am serving), or if I alone am serving, my successor Trustee nominated herein, is jurisdictionally proper and still currently applicable, holding me to be legally incapacitated to act in my own behalf or appointing a guardian or conservator of my person or property to act for me; or
(ii) Duly executed, witnessed and acknowledged written certificates of two licensed physicians (each of whom represents that he or she is certified by a recognized medical board and is not related by blood, adoption or marriage to me or any Trustee or any beneficiary hereunder), each certifying that such physician has examined me and has concluded that, by reason of accident, physical or mental illness, progressive or intermittent physical or mental deterioration, or other similar cause, I had, at the date thereof, become incapacitated to act rationally and prudently in financial matters; or
(iii) Evidence, which in the opinion of my Trustee serving (other than myself, if I am serving), or if I alone am serving, my successor Trustee nominated herein, is credible and still currently applicable, that I (A) have disappeared, (B) am unaccountably absent, or (C) am being detained under duress where I am unable effectively and prudently to look after financial matters;
then, in that event and under those circumstances, I shall be deemed to have thereupon become "incapable of managing my own affairs" for the purposes of this agreement, and such status shall be deemed to continue until such court order, certificates, and/or circumstances have become inapplicable or have been revoked. Any such physician's certificate may be revoked by a similar certificate to the effect that I am no longer thus incapacitated, executed either by the originally certifying physicians or by two other licensed, board certified, unrelated physicians.
(b) My Trustee serving (other than myself, if I am serving), or if I alone am serving, my successor Trustee nominated herein, shall not be under any duty to institute any inquiry into my possible incapacity, but the expense of any such inquiry reasonably instituted by my Trustee may be paid from trust assets;
(c) I hereby waive all provisions of law relating to the disclosure of confidential medical information insofar as that disclosure would be relevant to any such inquiry into my ability to manage my own affairs.
FROM: Frederick J. Tansill
RE: REVOCABLE LIVING TRUST FUNDING INSTRUCTIONS
Once you have executed your estate planning documents, you should take steps to fund your revocable living trust in order to maximize its usefulness as a probate avoidance, estate planning and financial management tool.
Set forth below are general instructions regarding the manner in which you can fund your Trust with the various assets of your estate. We have attempted to cover all assets which you now own and can expect to own during your lifetime. In the event that an asset you may acquire in the future is not covered by these instructions, or should you have any questions regarding the funding of your Trust, please contact us.
For the purposes of funding your Trust, we recommend that the following Trust name be supplied to the various institutions with which you will have contact in the funding process:
" [Name of] Trust, dated _______________, 2004,
[Name of] Trustee"
You may find that you or a particular depositary institution holding a trust account may want to present the name of your Trust on its records in a slightly different way than set forth above. As long as the Trust's name and the Trustee's name are clearly identified on the institution's records, a slight variation from our suggested language is no cause for concern.
In all instances where a federal tax identification number is requested for your Trust, because you are a Co-Trustee you can supply your own Social Security Number.
It is unusual to transfer certain types of tangible personal property to your Trust: furniture, household goods, personal effects, automobiles, boats. While furniture and household goods normally are not transferred to a trust when they are owned by a married couple, because they are deemed jointly owned and pass automatically without probate to the survivor on the death of the first spouse to die, it may sometimes be appropriate to transfer to the owner's revocable trust, or acquire in the name of the owners' revocable trust, jewelry, works of art, stamp and coin collections, cars and boats. If you own or acquire a very valuable item of tangible personal property, it may well be desirable to place that item in your Trust in order to avoid probate of that asset at your death. Items that are titled through a government agency such as cars and boats, should be titled in the appropriate trust name. The two methods by which other items of tangible personal property can be transferred to your Trust are (1) written assignment of the item to your Trust (e.g., by Declaration of Gift which we can prepare) or (2) placing the item in a safe deposit box in the name of your Trust (see the paragraph below captioned Gold, Silver, Other Precious Metals, Jewelry, Collectibles). If you feel you have an item of tangible personal property that you may want to put into the Trust, please advise us of this fact so that we can determine if that item should be placed in your Trust.
Cash Accounts (Checking, Savings, Certificate of Deposit, Moneymarkets, etc.)
You should open a bank account or a moneymarket account at the institution of your choice titled in the name of the Trust (as set forth above), and transfer to that account the funds you are currently holding in various bank accounts.
Title to a bank account is normally indicated by a signature card which should be registered in the name of your Trust. You should be prepared to present a copy of the executed Trust Agreement to the bank official completing the signature card. The Bank official will want to assure himself that the Trust instrument creating your Trust has been properly drawn and executed before opening an account in the name of your Trust. All Trustees should sign the signature card so that any of them may sign checks.
If you have a credit union account, the institution's policy might not permit the account to be registered in the name of a trust. In such event, you may inquire if your Trust can be listed as the beneficiary of the account. This designation is sometimes referred to as a "Pay on Death (P.O.D.)" designation.
If the credit union account cannot be registered in the name of your Trust, you should also determine whether the credit union will honor your General Power of Attorney in the event access to the credit union account is necessary at a time when you may be incapacitated.
Gold, Silver, Other Precious Metals, Jewelry, Collectibles
Any gold, silver or other precious metals, jewelry or small collectibles can be transferred to your Trust by placing such metals, jewelry or collectibles in a safe deposit box titled in the name of your Trust as set forth above.
Virginia Real Property
Real property located in Virginia does not have to be titled directly into the name of your Trust since Virginia is one of the few states whose laws provide that real property passes directly to a beneficiary under a Will outside of probate. On the other hand, you may, if you wish, title Virginia real property in the name of the Trust.
Real property titled jointly or as tenants by the entirety will pass to the surviving spouse at death outside of probate. In most states an interest in real estate owned by an individual in his or her sole name will be subject to probate, and real estate outside your state of domicile will be subject to an ancillary probate in that state. You may, if you want to, put a real estate interest, including a partial interest in the form of a tenancy in common, into your Trust. Under Federal law this transfer cannot be deemed to trigger a due-on-sale clause in any secured financing on the property if it is personal use property, i.e., a primary residence or vacation home. If you leave real property held in your sole name outside your Trust, however, you will be relying on your General Power of Attorney for the management of this property should you become incapacitated during your lifetime. (We have attempted to list in your General Power of Attorney all freehold real property investments you own, either in fee simple, tenancy by the entirety, joint tenancy, or tenancy in common, but not interests in partnerships or corporations holding real estate. This is important because your attorney-in-fact will probably not be able to convey insurable title in real estate unless it is specifically listed in the Power of Attorney.) Please let us know if we failed to list any real estate interests in your Power of Attorney. In general we find that clients, particularly couples, are reluctant to put their principal residence into their trusts. We do not see any strong reason for you to put a residence in trust at this time. If you have any out-of-state properties that you plan to sell in the foreseeable future, it may not be worth the trouble and expense at this point of putting those properties into your Trust. If you have or acquire real estate outside of your state of domicile that you plan to hold on to, you should consider titling it in trust name. (Couples may title properties partly in the respective trusts of each, which would hold those interests as tenants in common.)
The transfer to your Trust of real property can only be accomplished by executing and recording a deed. The deed should be prepared and recorded by an attorney in the state in which the property is located. If you request, we will be happy to prepare the necessary deeds for property in Virginia, Maryland or the District of Columbia, or to arrange for the preparation of the necessary deed by an attorney in any other state in which your property is located.
Before the transfer of the real property to the Trust is made, you should be aware of any transfer of title or recordation fees which may be assessed and you should be sure your title insurance will not be impaired by the transfer. A new endorsement of your title policy may be required.
Stocks, Bonds, Securities, Street Accounts, Promissory Notes, etc.
Marketable securities held in a street account with a stock broker can be transferred to your Trust by establishing a street account in the name of your Trust as set forth above and then transferring the securities to that account, or by retitling your existing account. We recommend that you hold trust securities in a trust brokerage account to facilitate transfers and record-keeping.
Any stock or bond certificate can be transferred to your Trust by registering the certificate to reflect the name of your Trust as set forth above.
One method to reregister the certificate is to take it to the stock broker with whom you do business and request that the stock broker have the certificate reregistered. The broker may want to review a copy of the Trust Agreement. The stock broker will send the certificate to the transfer agent for cancellation of the old certificate and reissuance of a new certificate in the name of your Trust. You may also deal directly with the transfer agent, but if the certificate is lost in the mail, you will have to obtain a lost certificate bond in order to have a new certificate issued.
Whether you go through a broker, or deal directly with the transfer agent, the back of the certificate, or an irrevocable stock power identifying the certificate, must be signed by you and your signature must be guaranteed by a bank, trust company, or a New York Stock Exchange firm, before surrendering it for reissuance. Before you sign the certificate or irrevocable stock power, you should fill in the name of your Trust as the transferee.
A promissory note can be transferred to your Trust by assigning the beneficial interest in the note to your Trust. If the note is secured, the security should also be assigned.
Bearer bonds can be transferred to your Trust by a written assignment, or by placing the bonds in a safe deposit box titled in the name of your Trust (see Gold, Silver, Other Precious Metals, Jewelry and Collectibles above).
To transfer a limited partnership interest to your Trust, title to a Certificate of Limited Partnership should be reregistered to reflect the name of your Trust as set out above. The certificate can usually be reissued by the General Partner upon surrendering the present certificate with a request that it be reregistered. If the partnership interest is expressed in the Articles of the Limited Partnership, the General Partner should be requested to issue an addendum to the Articles, reflecting ownership in your Trust. Some limited partnerships restrict the ability of a limited partner to assign his or her interest. Consent of the General Partner may be required.
If the Limited Partnership purports to own real estate, but in fact your individual name appears in the recorded deed, then you should have a deed prepared to reregister the recorded title, in addition to the change of the partnership interest. Once again, you should inquire as to whether this will cause any transfer or recordation fees to be assessed.
Oil, Mineral and Gas Interests
Oil, mineral and gas interests can be quitclaimed to your Trust, and any existing leases can be assigned to your Trust. Title should reflect the name of your Trust to which the interest or lease is transferred as set forth above. We can prepare these documents. You can expect us to request that you furnish us with a copy of the present title and any such lease. If these are partnership interests, the General Partner's consent may be required.
An account under a pension plan, IRA, Keogh, etc., may reflect your Trust as primary or alternative beneficiary. You should contact the benefits department of your employer, the account holder or the plan administrator, to confirm your presently designated beneficiaries or to secure the proper form for designating new beneficiaries. For income tax reasons it is rarely desirable for benefits of a married individual to be paid to a trust. It is generally preferable for tax purposes to designate a spouse as primary beneficiary, to permit the opportunity for continued deferral of income tax or tax-free rollover to the spouse's IRA at death. You should consider the income tax issues carefully. The Trust may be the ideal secondary beneficiary if a spouse does not survive if you want to hold each child's share in trust until he or she attains a certain age; or, if your children (and their descendants, per stirpes, if they do not survive) are named as secondary beneficiaries, your Trust could be third beneficiary, to take only in the event that no spouse, children or descendants survive.
Life insurance policies may reflect your Trust as the primary or alternate beneficiary using your Trust's name as set forth above. Changing the beneficiary designation should be done through the agent handling the insurance or account, or through the benefits department of your employer. Your Trust may be an appropriate primary or secondary beneficiary of your insurance if either (1) you want to use the insurance proceeds to help fund the unified credit bypass trust for your spouse and/or children in the amount of $625,000, to avoid tax in your spouse's estate on the balance remaining at your spouse's death, or (2) if you want to put the insurance proceeds into a QTIP marital trust for your spouse from which your spouse will receive all income and have access to the principal if needed, with the residue passing to your children at your spouse's death, or (3) if you want to put the insurance proceeds in trust for your children (and their descendants, per stirpes, if they do not survive) until they attain a certain age.
Assets titled in the name of your Trust at the time of your death will not be subject to the legal and other expenses, public disclosure and delays of probate. Neither will retirement plans or life insurance proceeds payable to your Trust be subject to probate. Neither will assets held as joint tenants with right of survivorship or as tenants by the entirety with right of survivorship be subject to probate. Only assets held in your own name alone will be subject to probate.
FJT/slb
I, , of , own as my own property in my sole name the items described below. I desire to give the described property to the trustee[s] of my Revocable Trust dated this day of , 1998.
To carry out this purpose, I hereby give and deliver to the trustee[s] title to the property described below. It is my purposes and intention to vest all of the incidents of absolute ownership in the property in the trustee[s] from this time forward.
IN WITNESS WHEREOF, I have hereunto set my hand and seal at McLean, Virginia, this day of , 1998.
THE ABOVE ITEMS ARE RECEIVED AND ACCEPTED BY THE TRUSTEES THIS DAY OF , 1998.
19. To add any property owned by me or to which I may become entitled to my Revocable Trust dated [5] of which [6] and [7] are Trustees, and/or to invest any or all of my assets in common trust funds of any kind.
22. To make gifts on my behalf to my children or grandchildren, to file state and federal gift tax returns, and to file a tax election to split gifts with my spouse. Gifts to any of my children must be made equally to all of them. Gifts to any of my grandchildren must be made equally to all of them. The power to make gifts to my children may be exercised only (a) by my spouse while my spouse serves as attorney-in-fact, or (b) in the event one or more of my children are serving as attorney-in-fact, by _____________, which may serve as my attorney-in-fact for that purpose and no other if my children who are serving as attorney-in-fact consent to its exercising this power while my children act as my attorney-in-fact for all other purposes. My attorney-in-fact shall not make gifts that discharge any of the legal obligations of support of the attorney-in-fact. ______________ shall not be obligated to make gifts if requested to do so by my children; rather, it may elect to make or not to make such gifts in its discretion, acting in a fiduciary capacity as my attorney-in-fact.
To create a revocable trust or irrevocable lifetime trust on my behalf for my benefit and/or for the benefit of my descendants, to contribute property of mine to such trust from time to time, and, in the case of a revocable trust established by me or by such attorney-in-fact, to revoke any such trust created by such attorney-in-fact if the attorney-in-fact deems that to be appropriate. Any such trust must contain the same provisions as my then current Will with respect to the disposition of trust property after my death. If the creation of such an irrevocable trust would constitute a completed gift, it must be done in compliance with Paragraph 22. of this General Power of Attorney, which governs the power of my attorney-in-fact to make gifts. My attorney-in-fact shall not have any right to revoke or alter any will I have made, nor have any right or power to alter, amend, revoke, terminate or withdraw from any trust which I have created.