revocable Archives - Gordon Fischer Law Firm

A trust is a very useful legal arrangement which may save you, your heirs, and beneficiaries a great deal of money, time, and trouble, as well as help to keep important matters private.

A trust is what one might consider an “extra” document to a basic estate plan (but an “extra” that can be super helpful, for the reasons discussed below). Over the last several blog posts, I discussed the six basic documents that should be part of most everyone’s estate plan:

At the outset of this seven-part series of blog posts about estate planning, I explained the basics of a will. Then, I covered health care power of attorney, and also financial power of attorney. Most recently, I blogged about disposition of final remains.

When should you consider setting up a trust? You might consider a trust if you have:

A blended family;
More than $1 million in total assets;
Unusual assets (such as one or more antique automobiles);
Complex assets (for example, more than one piece of real estate, like a home and a vacation cabin); and/or
Ownership of part or all of a business.

In such cases, as well as others (talk to your estate planning lawyer!), a trust may be helpful.

WHAT IS A TRUST? HOW DOES IT WORK?

A trust will ensure that your wishes are followed and your assets appropriately handled after your death. A trust is simply a legal agreement among three parties—settlor, trustee, and beneficiary—that provides instructions on how and when to pass assets to the trust’s beneficiaries. Let’s look at the role of each of these three parties, then delve more deeply into how trusts work.

SETTLOR

A settlor—sometimes called the “donor, “grantor,” or “trustor”—is the person who creates the trust and has the legal authority to transfer assets into it.

TRUSTEE

The trustee is the person who agrees to accept, manage, and protect the assets delivered by the settlor. The trustee has a fiduciary duty to administer the assets according to the trust’s instructions, and distribute the trust income and principal according to the rules outlined in the trust document. Distribution is done in the best interests of the beneficiary.

A trustee can be one, two, or more people. A trustee can also be what is known as a “corporate trustee,” such as a financial institution (like a bank) or a law firm that performs trustee duties and charges fees for their services. There are no formal requirements for being a trustee, and nonprofessionals frequently serve as a trustee for family members and friends.

BENEFICIARY

The beneficiary is the person or entity benefiting from the trust. The beneficiary can be one person or entity or multiple parties. Trust beneficiaries don’t even have to exist at the time the trust is created (such as in the case of a future grandchild or a charitable foundation that has not yet been established).

TRUST PROPERTY

A trust can be either funded or unfunded. “Funded” means that the settlor’s assets—sometimes called the “principal” or the “corpus”—have been placed into the trust. A trust is “unfunded” until the assets are in it. Please note that failing to fund a trust is a common estate planning mistake!

TRUST ASSETS

Trusts can hold just about any kind of asset: real estate, intangible property, business interests, and personal property. Common trust properties include farms, buildings, vacation homes, stocks, bonds, savings and checking accounts, collections, personal possessions, and vehicles.

“IMAGINARY CONTAINER”

Think of a trust as an “imaginary container” that holds and protects your assets. After the trust is funded, the trust property will remain in the same place as before the trust was created—your land will remain where it always was, your artwork on the wall, your money in the bank, your comic book collection in the den. The only difference is the asset will have a different owner: “The Jane Jones Trust,” rather than Jane Jones.

TRANSFER OF OWNERSHIP

Putting property in a trust transfers it from personal ownership to the trustee, who holds the property for the beneficiary. The trustee has what is called “legal title” to the trust property and, in most instances, the law treats trust property as if it were now owned by the trustee. Each trust has its own taxpayer identification number, just like an individual.

Do not be mistaken, trustees are not the full owners of trust property. Trustees have a legal duty to use trust property as directed in the trust agreement and as allowed by law. However, the beneficiaries retain what is known as “equitable title”—the right to benefit from trust property as specified in the trust.

ASSETS TO BENEFICIARY

The settlor provides terms in a trust agreement directing how the fund’s assets are to be distributed to a beneficiary. The settlor can provide for the distribution of funds in any way, so long as it is not against the law or against public policy. The near-limitless flexibility of trusts is a primary advantage for setting one up.

TYPES OF TRUSTS

A joke among estate planners says that the only limit to trusts is the imagination of lawyers. It’s true, though, that the number and kind of trusts are virtually unlimited.

Let’s start by taking a look at the four primary categories of trusts:

INTER VIVOS AND TESTAMENTARY TRUSTS

Trusts that are set up during the settlor’s lifetime are called “inter vivos” trusts.

Those that arise upon the death of the settlor, generally by operation of a will, are called “testamentary” trusts. There are advantages and disadvantages to both types of trusts, and how one decides depends upon the goals and purposes of the settlor.

REVOCABLE AND IRREVOCABLE TRUSTS

Inter vivos and testamentary trusts can be broken down into two more categories: revocable trusts and irrevocable trusts. A revocable trust, just as you might infer from the name, can be changed at any time during the settlor’s lifetime. The settlor can alter parts of the trust or even revoke the entire document.

IRREVOCABLE TRUST

An irrevocable trust, again, is as it sounds – it’s a type of trust that can’t be changed by the settlor after the agreement has been signed and the trust has been formed and funded. The terms of an irrevocable trust can’t be modified, amended, or terminated without the permission of the settlor’s beneficiary or beneficiaries.

A revocable living trust becomes irrevocable when the settlor dies because he or she is no longer available to make changes to it. A revocable trust can be designed to break into separate irrevocable trusts at the time of the grantor’s death for the benefit of children or other beneficiaries.

You might wonder, “Why make a trust irrevocable? Wouldn’t you want to maintain the ability to change your mind about the trust or its terms?”

Not necessarily.

Irrevocable trusts, such as irrevocable life insurance trusts, are commonly used to remove assets from a person’s estate and thus avoids the assets being taxed. Transferring assets into an irrevocable trust gives those assets to the trustee and the trust beneficiaries forever. If a person no longer owns the assets, they don’t comprise or contribute to the value of his or her estate, therefore they are not subject to, say, estate taxes upon death.

REVOCABLE LIVING TRUSTS

There is no “one size fits all” trust—different kinds of trusts offer different benefits (and drawbacks) depending on a person’s circumstances. Age, number of children, health, and relative wealth are just a few of the factors to be considered.

The most common trust my clients use is a revocable living trust (sometimes referred to by its abbreviation, “RLT”).

A revocable living trust is created while you’re alive and can be revoked or amended by you. An RLT has huge advantages:

MONEY-SAVING

Establishing a revocable living trust helps avoid costly probate—the legal process required to determine that a will is valid. Probate generally eats up about two percent (2%) of an estate, which can add up to a chunk of change you’d probably rather see go to your beneficiaries.

Avoiding probate also means avoiding other fees, such as court costs, that go along with it.

TIME-SAVING

A revocable living trust not only eliminates the costs of probate, but the time-consuming process of probate as well. Here in Iowa, probate can take several months to a year, or sometimes even longer, perhaps leaving beneficiaries without their inheritances until th end of the probate process. The transfer of assets through a trust is much faster.

FLEXIBILITY

Don’t want your sixteen-year-old niece to inherit a half-million dollars in one big lump sum? I agree, it’s probably not a good idea.

A revocable living trust offers flexibility for the payout of an inheritance because you set the ground rules for when and how distributions are made. For example, you might decide your beneficiaries can receive certain distributions at specific ages (21, 25, 30, etc.), or for reaching certain milestones, such as marriage, the birth of a child, or graduation from college.

DRAWBACKS

Despite the significant advantages of establishing a revocable living trust, there are drawbacks people should be aware of. For starters, trusts are more expensive to prepare than basic estate plan documents such as a Will. However, the costs associated with sitting down with a lawyer and carefully creating a trust is, in my opinion, greatly outweighed by the money your estate will save in the end.

Creating a trust can also be an administrative bother because assets (farm land, business, stock funds, etc.) must be retitled in the name of the trust. All things considered, this is a small inconvenience that is greatly outweighed by the smooth operation of a trust when you pass away.

YOU CAN TRUST ME TO TALK ABOUT THE BEST TRUST(S) FOR YOU

Interested in learning more about trusts or questioning if you need one? Feel free to reach out at any time by email, gordon@gordonfischerlawfirm.com, or on my cell, 515-371-6077.

If you want to simply get started on an estate plan (everyone needs at least the basic documents in place!) check out my estate plan questionnaire, provided to you free, without any obligation.

*OK, not everything. But many things, let’s say, an excellent start.

Here on the GFLF blog we talk a lot about the transfer of property made at the time of death through estate planning tools like a will, disposition of personal property document, or a trust. Everyone needs an estate plan to most effectively and seamlessly transfer real property (think land and real estate) and personal property (think jewelry, art, all of your “stuff”) to the people and charities you care most about. These are all called testamentary gifts. (Think “last will and testament” if that makes it easy to remember.)

As you probably know all too well, you can also make gifts to other people during your lifetime. These are called inter vivos gifts if you want to be lawyerly with it. This one’s easier to think about because you’ve been giving gifts for holidays, birthdays, weddings, and anniversaries regularly. You can also make gifts while living of cash, real estate, land, stocks/bonds, and other non-cash assets to charitable organizations.

One specific type of inter vivos gift doubles down on the Latin–it’s called a gift causa mortis. This type of gift is made by the donor while they’re alive in the event of impending death. Causa mortis in Latin translates to “because of death.” Sometimes this type of gift is referred to as a deathbed gift. The most common kind of gifts causa mortis tend to be small, valuable and/or meaningful gifts like a wedding ring.

To make this more salient, consider the scenario where Abe was in a severe accident and is aware that he is going to pass soon. Abe turns to his son Bob, who rushed him to the ER, and tells him that he wants him to have his watch. He takes it and gives it to his son Bob and then gets rushed into surgery. This is a simple example of a gift causa mortis.

Now, with out amateur Latin lesson complete, let’s dive into the elements of the rules related to gifts causa mortis.

Elements of Gifts Causa Mortis

A valid inter vivos gift involves:

intent by the donor facing imminent to donate;
delivery of the gift; and
acceptance by the donor.

Delivery of the Gift

The gift must be delivered to the recipient. That’s easy if it’s something handheld like jewelry that you’re wearing, but what about anything that the donor doesn’t have on them personally? So long as the “delivery” is sufficiently symbolic, that will suffice if physical delivery at the time of the gifts is impractical.

Another Hypothetical

Let’s say a donor wanted to make a gift causa mortis of an antique piece of furniture to their niece. At the time the donor was residing in a hospice facility and very clearly toward the very end of her terminal illness. It would be impractical for the law to expect the dying donor to physical deliver the furniture to her niece. As long as the donor gave the niece a symbolic representation of the gift, such as writing out the details of the furniture’s location and details in the presence of a witness, it would likely be found valid upon the donor’s passing.

Another example that applies arose out of a case where a donor’s delivery was found to be valid where she signed the back of her car’s certificate of title to gift the automobile to her brother.

Can I Get a Witness?

To avoid post-mortem litigation by other heirs-at-law or the decedent’s estate’s executor, it’s preferable if the delivery of the gift is witnessed by a third party who can attest to the validity of the gift. Additionally, if there is an option for a piece of writing to be made out detailing the gifts and signed in the presence of a third party, that’s even better.

Revocable & Conditional

Gifts causa mortis are revocable, which means that the donor (the gift giver) can revoke the gift at any time (while still alive). This revocation can be completed unilaterally, with only the donor. This is different than an inter-vivos gift, which when completed, is completely irrevocable.

Gifts causa mortis are also conditional on the donor’s death, meaning the gift giver actually has to perish before the donee’s ownership is valid.

Taking it back to our story with Abe and his son Bob: if Abe gave his watch to Bob before surgery with the imminent expectation of dying soon, but ended up living through the surgery, the gift is no longer valid and automatically revoked. Of course, Abe could choose to make an inter-vivos gift to Bob if he decided to do so.

Additionally, if the recipient dies before the donor, then the gift is revoked and the beneficiary’s estate has no claim to the property.

Imminent Death

For a valid gift causa mortis, the donor has to die imminently…what constitutes “imminent death?” This has been debated in different cases. What’s clear is the gift giver doesn’t have to die immediately, like seconds after the gift is given. But, the donor must pass away from the danger or condition that was present at the giving of the gift. Plus, it doesn’t “count” if the donor has a fear that they might die at some vague point in the future.

Intervening Recovery

Additionally, there must be no intervening recovery between the gift and death.

Back to our hypothetical: let’s say Abe goes into surgery and survives from the injuries relating to his accident. At this point the gift of the watch is invalid. Abe may unfortunately go on and pass away from a different condition a few months later, but the previous gift causa mortis of the watch is not suddenly valid just because Abe eventually died.

What’s the Difference Between Gifts Causa Mortis and Testamentary Gifts?

Typically gifts causa mortis are informally made in the moment, are not planned to the same extent or formally written out like testamentary gifts. In the majority of states, gifts causa mortis are immediately transferred to the recipient’s ownership after death, whereas gifts made through a will or testamentary trust transfer ownership after the probate process is complete. Additionally, gifts causa mortis can only be made of personal property, not real property like your house or farmland.

How do Gifts Causa Mortis Fit into Taxes?

Similar to testamentary gifts, gifts causa mortis are taxed under federal estate tax law. The policy behind this is because the gifts aren’t complete until the donor’s passing. (Note well that the federal estate tax also applies to general inter vivos gifts made within three years of death. This means the value of such gifts is included in the estate in order to calculate the estate taxes.) It’s also worth noting that the federal estate tax applies to so few people now after the passage of the Tax Cuts and Jobs Act, so you don’t really to be concerned about this!

Final Words on Gifts Causa Mortis

Gifts Causa Mortis or not, there is no substitute for an airtight, updated estate plan. If you have such a plan in place, there’s no need to try and meet all the elements and intricacies of gifts causa mortis.

None of us know when our time will come, and we may not have the opportunity to give away our prized possessions via causa mortis right before death. But, we can know that estate plans never expire and can give you peace of mind that your property will be pass to the people you intend without legal contest (which can arise from gifts of causa mortis).

No questions are dumb questions when it comes to the complex world of property and estates. Don’t hesitate to contact GFLF or schedule a free consult to get your estate planning needs and goals in order.

Posts

In Trusts We Trust (Everything* You Need to Know About Estate Planning: Day 6)