Revocable and Irrevocable Living Trusts
General Form Requirements For A Revocable Living Trust
You may want to click to open a sample of a Revocable Living Trust in another window to follow along with this discussion. You should know that this is simply a sample of such a trust, and that each state law may affect the provisions which can be set forth in your trust to make it valid. Of course, this same state law may render some of the provisions in your trust invalid, if the law is not fully complied with in the creation of your trust. Also, each year state trust laws change through both legislative action and the judiciary opinions. Your trust created one year, may not be effective the following year if your state laws have changed.
It is critical to examine your trust needs with an attorney experienced in this area, and not to create your own living trust based on the documents provided here. These documents are only provided so that a general understanding of the trust concept can be gained.
In the sample, the following provisions are included:
The first section is designed to enable the Trustor to specify all of the parties to the Trust. The names of each should be included where indicated.
Article I: The Trust Purpose is a required element to have a valid trust, as the discussion indicated. The Trust Purpose specified here is that of holding and managing assets of the Trustor [Grantor] during and after his/her lifetime.
Article II: This provision is also an essential element of a valid trust. In order to be a valid trust, some property must be transferred into the trust. While it is not necessary, this trust references the possible receipt of property from the Trustor's Last Will and Testament. We have called this a "Pour-over Will." See our discussion and a sample of this "Pour-over Will" form.
Article III: Management of the trust shall be in accordance with the provisions set forth herein.
Article IV: Distributions. This section will specify how the Trustee shall distribute the property in the Trust during the lifetime of the Trustor. The most basic provision is that the Trustee will provide periodic payments to the Trustor. The reason for this is that typically with the person creating this type of trust, almost all of his/her assets are transferred to the trust. Thus, any income-producing stocks, bonds, investments, businesses, and related items are owned by the trust. Without these periodic payments, the Trustor might not have any regular means of income. That is why these periodic payments are set forth in the Trust Agreement.
One can see that in this Trust, the Trustor can change the amount of the payments if necessary. Also, this provision provides that any excess income, other than the payments to the Trustor which are specified, should be added to the Trust property.
In addition, should the Trustor suffer any needs during his lifetime, if it is specified in the Trust as it is here, the Trustee can make certain payments accordingly. In particular, a disability of the Trustor is provided for in the Trust, and the Trustee is given specific instructions on how to proceed if this occurs.
Disability is only one of the possible situations, and many more could be provided for in the trust.
Article V: This provision governs the distribution of the Trust property after the Trustor dies. Here, similar to the provisions in a will, the Trust property is simply given to the spouse of the Trustor, or, if the spouse does not survive the Trustor, the property is divided among his/her children in equal shares.
Keep in mind the options available in this distribution provision may be limitless, and may have tax or other consequences. An attorney may be consulted for ideas on how to distribute property.
Not set forth in this Trust, but a common provision to many trusts is for the trust to continue after the death of the Trustor and to be distributed to the children of the Trustor [after the death of the spouse of the Trustor] when they reach certain ages specified, e.g., one-half to each child when they reach the age of 25 and the remaining one-half to each child when they reach the age of 35. This depends almost entirely upon the desires of the Trustor.
Keep in mind that if the Trustor divides the Trust property among the children, and/or divides each child's share upon reaching certain ages, the Trustee needs to know what to do if the major Trust asset is the Trustor's house. Otherwise, it may have to be sold on the death of the Trustor and the proceeds invested until they are distributed. However, this may not be what the Trustor intended.
The final provision for the distribution is to the heirs of the Trustor in accordance with the laws of the Trustor's state. These are the intestacy laws, and are more fully discussed in the section on Wills.
Article VI: The Trustee's Powers. Since everything the Trustee does is governed by the Trust instrument [and usually unspecified state law], the powers which the Trustor may want the Trustee to have should be carefully thought out and then carefully stated in the Trust. Our Trust form contains a number of Trustee Powers, which should be read carefully and considered with your situation in mind. The following is a general discussion of certain provisions which may already be in our Form Trust or may be added. You should discuss these provisions with a Trust Attorney, available through your legal plan, if you are a member, to ensure that you consider all of the possible consequences of adding, or not adding, such a provision to your Trust.
This paragraph gives an example of a large number of powers which can be given to an agent. It is advisable to review each in detail, and to make certain that you intend for your agent to have each power. If there is one or two powers that are not acceptable to you, or seem irrelevant to your particular circumstances, you should leave these out of your document. Or if there are a large number of the powers listed that are not acceptable to you, you might consider handcrafting a more limited designation of powers to an agent. Remember, your provisions must be clear, since you will not be able to explain what you meant, and handcrafting any provisions is almost always better left to an attorney who may have more insight into language which may be more readily accepted in courts should a challenge ever arise.
Example 1 - Power To Sell Property. This power gives the Trustee the right to sell any or all of your real property, such as land or houses; your personal property, such as furniture and clothes; and intangible property, which can be items such as songs, books, or other rights you may own. This paragraph also sets no limits on your Trustee to sell at market value or at a profit or that which constitutes a "good business deal" as you understand it. There are also no limits on what to do with the proceeds from the sale. Presumably, your Trustee must use these proceeds for the Trust benefit, but there is no language in this document which provides this limitation.
This paragraph contains no limitations on the Trustee, so it is imperative that you understand that upon the moment of execution of this document, you could be allowing your Trustee to sell some or all of your property with no relation to the market value or "fair price" which you may intend. This broad language illustrates the dangers faced in not being specific or limiting enough. And, it also demonstrates that you must trust the Trustee considerably.
Example 2 - Power to Buy Property. Similar to the power to sell discussed above, this provision confers a broad power to the Trustee to purchase all types of property on your behalf. The same considerations discussed under the power to sell are applicable here. Be sure that you want your Trustee to have this broad power.
Example 3 - Power to Borrow. This power gives your Trustee the broad power to encumber any of your property. Encumber means to borrow against or to put liens against this property to secure loans. This essentially means that you have conferred broad power on your Trustee to get loans, on your behalf, for any reason. Again, this paragraph, as it is written, confers a tremendous amount of power on the Trustee. Ideally, you should provide language which places significant limitations on the actions of a Trustee, if necessary.
Example 4 - Power to Invest. This provision enables the Trustee to invest your property. This means that the Trustee might have the inherent power to convert your property into marketable property, such as stocks or bonds. This also means that in addition to investing your property in other property, you may be conferring the power to convert it into other property. You should be sure that this is an intended result before putting this provision in your Trust.
Example 5 - Power to Enforce Rights. This power covers authorization to enable the Trustee to take a variety of actions on your behalf. This power gives your Trustee the right to send out a letter "demanding" [which really means requesting] payments owed to you. It also gives your Trustee the right to sue another person to collect debts which may be owed to you or to enforce actions which may be in your best interest. For example, if a person to whom you lent $5,000 was supposed to pay you in monthly installments and has not done so, the Trustee will be able to sue to collect this money. If you secured this debt with a parcel of property, your Trustee may be able to hire an attorney and foreclose on the secured property [assuming state and federal law permits such foreclosure.] Obviously, for $5,000 there is a practical limit to the amount of money the Trustee can spend to secure compliance with the terms of the debt instrument.
The Trustee may also be entitled to settle your account with the person who owes you money. For example, the Trustee could decide that this debt should be fully and completely settled for the sum of $4,000, or even $1,000. Under this provision as it is written, the Trustee could settle for either amount and still be within his/her powers as you have drafted them. Depending upon which amount is the settlement amount, you may or may not be particularly pleased with the actions of the Trustee. Thus, it is critical to select the Trustee who will best serve your interests.
This document may also include a provision regarding social security benefits and gives the Trustee the power to receive these benefits. The Trustee can, by virtue of the power conferred in this document, deposit these amounts in the trust account which you designated. Of course, all interest and other proceeds are required to be held for the Trust benefit as well.
Example 6 - Powers As To Retirement Funds. Again, this provision confers the power to essentially do anything that you could do with respect to your retirement accounts, IRAs or other such accounts. Naturally, this could be a substantial sum of money, and to ensure that your estate is properly preserved, a trust is often the best protection you may have.
Example 7 - Powers As to Bank Accounts. This provision clearly gives the Trustee full authority with respect to the Trust bank accounts. Remember to consider if, and how, a Trustee should have any authority over any joint accounts which may have to be transferred to the Trust.
Also, you should consider that by virtue of establishing a Trust and appointing a Trustee, the Trustee may have the power to open or close bank Trust accounts, which others, such as your spouse, might be relying upon for their needs. By transferring these accounts in to the Trust, you are giving the Trustee the power to act in what they may believe is the Trust's best interests, although this may not be acting in the best interests of your spouse. Again, an attorney should, at the least, be consulted for advice in this area.
Example 8 - Powers As to Safe Deposit Boxes. Taking possession of the safe deposit box key effectively gives the holder the right, under this instrument as it is written, to exercise control over the contents of a Trust safe deposit box. Problems may arise as to property which may be jointly held, but for which no documents of title may exist. Precious stones, jewelry, coins or related items, often have no documents of title, but might be considered possessions of more than one person, such as husband and wife who may have a joint safe deposit box. Also, there must be a reasonable identification of each item and some written evidence that each item was transferred to the Trust. Otherwise the Trustee will not have authority over this property. Additionally, you should know that transferring some or all of this property into the Trust and giving a Trustee the authority to control this safe deposit may conflict with the other person's needs and/or understanding, as well as cause significant operational problems during the life of the Trustor and even more problems after his/her death. Significant care should be taken to avoid problems, since the whole idea of this Trust is to avoid ending up in court, fighting over possessions, money, or property.
Example 9 - Powers As To Claims/Actions. This provision is limited and focuses on any legal action or claims owned, or owed by the Trust. This means that giving the Trustee power in this area allows him/her to collect on any legal actions which the Trust may have, or to sue or mediate or take actions to settle any such claim. Also, for anything that the Trust may be liable to others for, or for which others may have a claim against you, this power enables the Trustee to defend the Trust interest by negotiation, hiring an attorney, submitting a claim to an insurance company or other such action. Courts will usually recognize valid Trusts in settlements or actions in court, if necessary.
On the other hand, you should realize that the signature of, representations of, or other actions by the Trustee will bind you during any litigation and thereafter, in the event that any Trust property on which such action was taken is transferred back to you for some reason. Thus, you will not normally be able to re-open a lawsuit previously settled by a Trustee while the property was in the Trust. Other parties are permitted to rely upon the actions of the Trustee, and to make decisions and to take actions in reliance thereon.
Example 10 - Power To Insure. This power gives the Trustee the right to purchase, sell, exchange, or alter [assuming the company will agree] the terms of a life insurance policy. This provision also may enable a Trustee to change your beneficiary or to change the direction of the proceeds, dividends or other income of the policy, if any were to be paid. The power is broad enough to enable a Trustee to effectuate changes on joint insurance policies which you may have with others, typically your spouse, parents or children, although the Trustee will not be able to effectuate any changes in any interests not owned by the Trust.
Unless otherwise specified, the Trustee may not be required to follow any agreements which you may have had with these others, including any agreements or understandings which you may have had with your spouse. As a result, you should discuss this Trust with your spouse or other family member to ascertain whether any conflicts might arise. It would be wise to think about various situations to make sure you have considered potential conflicts. This is an area where lawyers, who are used to dealing with anticipating future problems, might be able to assist.
Example 11 - Power Regarding Taxes. Generally, a Trustee is given the power to file a tax return for the Trust, and to pay any taxes owed out of the proceeds of the Trust. The actual requirements of the Internal Revenue Service and/or various state taxing agencies is beyond the scope of this discussion.
Do keep in mind that many state taxing agencies and the Internal Revenue Service impose civil penalties, and sometimes criminal penalties, associated with various actions as to tax filings. Be sure the Trustee is mindful of the importance of these, since the actions of the Trustee could possibly be imputed to your estate, or even the estate(s) of the beneficiaries, with potentially disastrous results. For example, what if the Trustee failed to file a Trust return for two years, and failed to pay $25,000 in taxes. This could result in a serious liability owed to the Internal Revenue Service, along with the penalties and interest.
As another example, consider a reckless and not well-founded series of "deductions" claimed on your return for two years by your well-meaning Trustee. If these were disallowed, your estate might owe much more in income taxes and penalties.
Example 12 - Powers to Make Gifts or Loan Money. These are fairly self-explanatory. One only needs to make certain that the Trustee will act in accordance with the best interests of the Trust, if they were to receive this broadly constructed power.
Example 13 - Powers As To Land. This provision gives an extremely broad power as to any property, land, or related rights, which the Trust may hold, own, lease, sublease, or otherwise retain an interest. This provision is extremely broad and because each of the powers conferred herein, e.g., power to maintain or power to grant easements, is generally handled by professionals, it would be wise to proceed with caution here. It is unlikely that any Trustee you select will have the expertise required to handle all of these powers in a professional and business-like manner. Most land holdings are related to some investment value or income-producing value that requires the persons making decisions regarding these holdings to have some expertise to ensure the value is protected and ideally, enhanced, for the Trust.
Also, because of the various bodies of state laws regarding landlord tenant laws, sublease laws, license laws, trespass laws, royalties and rental income laws, real property transactions and the other bodies of law associated with each of the items set forth in this paragraph, it would be incredibly difficult to advise you to confer this broad power without substantial legal advice, perhaps from more than one attorney. Many of these fields are different, and require different levels of expertise.
On the other hand, a carefully construed and limited power, such as the power to collect rents, may be very helpful to the Trust, if you cannot supervise the collecting of rents, and need a person to do so.
Thus, not all of these powers should be ignored or eliminated. Each may have its proper application. However, it may be very difficult for you to construct a provision which adequately takes into account the specific needs of your situation.
Example 14 - Powers As To The Operation of A Business. This power gives your Trustee the right and authority to step in and run any business transferred to the Trust, or to buy a business on behalf of the Trust, or to sell a business transferred to the Trust. As with other Examples, transferring this property into a Trust and appointing a Trustee sounds easy enough, but there is a degree of professionalism or skill necessary to conduct some of these tasks. While a Trustee may help you ensure a smooth transition in running a family business, this is not always the way it works in practice, unless the Trustee has a high degree of business skill and experience with the business.
You should take great care to receive serious business and legal advice as to all parameters of this power prior to including it in your Trust. Otherwise, your greatest asset may become a liability worth very little in a short period of time. Mismanagement is an enormous problem with all businesses. Along the same lines, authorizing your Trustee to purchase a business, as this provision does, when you may not have owned one in the past may be ludicrous. This power enables the Trustee to completely obligate the Trust assets to secure any such purchase, and then retains full authority over other of the Trust assets to utilize them, if necessary, to run the operations of this business. It is a safe [practical, not legal] rule that if you do not otherwise have any interest in a business, you ought not to give your Trustee the authority to purchase, lease or take over a business without you.
Example 15 - Power to Allocate Between Principal and Income. This provision confers on the Trustee the power to decide what is the principal property of the Trust and what is the income property of the Trust. Typically, the "principal" is the property that is transferred into the Trust. The "income" is the money that the property transferred into the Trust earns, after it has been transferred into the Trust. An example is an apartment building. The building is the principal, once it is transferred into the Trust, and the rents and other income which it earns after this transfer is the income to the Trust.
The reason for this allocation provision is that some paragraphs of many Trusts refer to income distributions or principal distributions. This distinction can be very important, especially since a beneficiary may be entitled to a distribution(s) of income from the Trust, but not be entitled to the principal of the Trust, since the principal may be being held in trust for others after that particular beneficiary.
By giving the Trustee the sole power to decide what is income and principal, the Trustee can decide, based upon the provisions of the Trust, which beneficiaries are entitled to what property. If an income beneficiary only receives certain property designated by the Trustee as income property, the beneficiary may believe that he/she is entitled to other property in the Trust. The power of the Trustee to make this decision may result in some insulation from the liability of a potential lawsuit by such a beneficiary who might claim they are owed more than they received.
Article VII: Other Powers. There are a number of other situations which may arise, or contingencies which you may be considering. Thus, it is an excellent idea to discuss each and every one of these powers with an attorney, prior to placing any such power in your Trust. Each has several uses, but if they are not properly limited, these powers can cause many unintended consequences.
Some of the optional powers set forth in our sample include the provisions for what happens if the Trustor is also the Trustee, the disability of the Trustor who is a Trustee, and what happens if a Trustee resigns and a successor is necessary.
The requirement of an "accounting" is almost always a good idea. However, it also means that the Trustee must engage in a number of reporting activities each year similar to running a business, such as reporting to the beneficiaries the results of balancing the checkbook, reconciling the accounts, paying bills and receiving income. Sometimes the Trustor does not want others to know this information. The problem is that such reporting to beneficiaries may help them understand the Trust and their interest or future interest therein. To include this power is entirely up to the Trustor, but which decision ought to be made after consultation with a lawyer.
Article VIII: Revocation or Amendment. This living trust is a revocable living trust, in that this Article provides for the potential revocation or amendment of this Trust by the Trustor. While this obviously confers the power to the Trustor, who could terminate this Trust at any time for essentially any reason, this may not be the ideal manner in which to set up your Trust. In fact, many trusts, if they are revocable, are not effective for many purposes, e.g., certain Internal Revenue Code sections may not be effective.
Whether to make your Trust revocable in large part depends upon your purposes for making the Trust. But, you should verify with professional counsel that what you wish to accomplish can be accomplished by using a revocable Trust. If it cannot, you may be forced to decide whether to set up a Trust that is irrevocable, in which you forfeit any power forever to change the Trust once it is made.
Articles IX, X and XI: These paragraphs provide which state law applies, and that if a provision is declared to be invalid that the entire remaining Trust remains effective. The Perpetuities provision is too complicated to explain, but requires that the Trust must terminate before the last person who may become a beneficiary under the Trust reaches the age of 21. This is necessary in some states and can be further discussed with your attorney, if necessary.
The Signature Line: This signature line enables the Trustor and the Trustee to sign their name and date on which this document was signed. Be sure to recognize that this Trust may also require, in some states, two witnesses to actually witness your signing and a notary to witness your signature. If your state requires this, you cannot sign this document without the presence of a notary and two witnesses. Remember, your state law may require a different form of signing. To be certain your document will be considered valid, you must follow your state's laws.
Witnesses' Statements [If Required]: The witnesses' statements are for the purpose of having the witnesses state that they are of sound mind, that they observed the Declarant and that they believe he/she is of sound mind. The witnesses also state that they are not relatives, that they will not benefit from the estate of the Declarant, that they are not healthcare professionals, and that they do not have any claims against the estate.
If it is required in your state, the purpose of this Witness statement is important. As the Declarant you should carefully select your witnesses. This shows the need for important advance preparation of this document. For example, if you waited until you were admitted to the hospital, you might have to rely on a person in the next hospital bed or room to be your witness. Aside from the obvious that they may not be well enough to attest to your sound mind if the need arose, there is the more important question of whether you would even be able to find that witness to testify in court some years later, if necessary.
Remember that if there is any possibility that legal action could be brought by anyone to question your competency to make this Trust, you will feel much better about your case and your wishes being upheld if you have selected two witnesses who make a prominent or truthful appearance should they ever have to testify in court or in any other legal proceeding.
Notary Public Attestation: This is a standard Notary Public attestation clause. It should be completed by the notary at the time you have signed the document and it should be signed by the notary. The notary should also place their stamp or seal on the document for authentication purposes. You should remember that the notary is also a potential witness and could be called to testify about whether you seemed competent at the time, whether you were acting erratic, or whether any person appeared with you and appeared to be attempting to influence you or to force you to sign this document.