Legally Speaking

Mark Jinkins

Although revocable living trusts have existed for many years, they have recently gained more visibility. You may have been approached through a “free” book, seminar, or other advertisement by an attorney claiming expertise in estate planning. The self-proclaimed expert attorney may give the impression that trusts can solve almost every estate planning and financial problem imaginable. Unfortunately, in their haste to make a sale, some provide inaccurate or otherwise tainted recommendations.

A trust can be an excellent tool. However, a trust is not an appropriate choice for everyone. Before you make a decision to establish a trust, invest time and effort in learning what it is. Also investigate alternative legal arrangements that may accomplish your goals effectively, such as beneficiary designations including transfer on death (“TOD”) and payable on death (“POD”) designations recently made available not only to real estate but also for any titled asset, marital agreements which transfer assets on death by nonprobate designation, or a durable power of attorney both for finances/property, and health care, and a will (including a “living will”).

A revocable living trust is a legal arrangement by which an individual shifts ownership of property (such as securities, a home, real estate, bank accounts, certificate of deposits, stocks, bonds, life insurance) from personal ownership into the legal ownership of the trust. A revocable living trust is just what the name implies – one that is created during an individual’s life, but that can be changed or terminated at any time. In Wisconsin, unless a trust is expressly made revocable by the document that establishes it, it is considered irrevocable.

The person whose assets are placed in the trust is called the settlor. The settlor should change the title of ownership of each asset that will be placed in the trust from his or her name to ownership by the trust. Merely setting up a trust agreement does not place any property into the trust – a separate transaction is needed for each asset. Property that continues to be owned in your own name, held in joint tenancy, or owned as tenants-in-common is not owned by or disposed of by the trust. Life insurance and retirement plan benefits that name a beneficiary other than the trust are not disposed of by the trust. Typically, a settlor reserves the right to amend the trust, change the beneficiaries, name a different trustee, or ultimately, to revoke the trust and have the property titled back in his or her name.

A trustee manages the trust’s assets according to the directions in the trust. The trustee can be the person creating the trust, a friend or family member, several individuals, a corporate entity (such as a bank) or any combination of these. As the initial trustee, the settlor can maintain full control of the trust until his or her death or incapacity. When the settlor relinquishes the trustee role, a successor trustee takes over. The successor trustee has legal responsibility for administering the trust prudently and solely for its beneficiaries, and must keep the beneficiaries reasonably informed. Naming more than one successor is advisable, given that a trustee may die or become incapacitated. The successor trustee should be trustworthy and have good business and management capabilities.

Except in a dispute among the beneficiaries, or between beneficiaries and the trustee, which is brought before a court, the trustee is not required to make an accounting to the court system. Some settlors prefer to make a financial institution – such as a bank’s trust department – their successor trustee. An institution can assure stability in the trustee role. Many institutional trust departments, however, may not accept small trusts or trusts that do not generate income. When selecting an institution as a trustee questions to ask include: What are the qualifications of its personnel? What rate of income and growth has the trust portfolio achieved recently, and historically? What are the fees for administration and services? Comparison of alternatives may be appropriate to find the best fit with the settlor.

The trust document contains instructions to the trustee regarding investment and management of the trust assets, who is to receive income from the trust, and what happens to the trust if the person creating the trust becomes incompetent or dies. The trustee can do only what the trust specifies. Ultimately, the trust will provide when the trust will be terminated and what assets are distributed to the beneficiaries.

Beneficiaries are named by the settlor and can be individual(s) who formed the trust, friends, family members, a hospital, library, or other charity or organization. Unless the beneficiaries are the trust settlors, they have no control over the trust. The trust should identify what is to be done with the trust property at the termination of the trust (often at the death of the settlor) and what happens to a beneficiary’s share if he or she dies before the trust terminations. The settlor may wish to consider writing safeguards into the trust so the beneficiaries cannot transfer their trust interest to a third party, or to protect beneficiaries’ trust interests from creditors claims. The trust assets are not protected from creditor claims against the settlor unless specific provisions which limits the settlors rights are included, nor does a trust insulate the settlor from claims of a surviving spouse.

The use of a revocable trust is one of many options that are available for estate planning. You should seek legal advice from a competent attorney who will help you determine what is the most appropriate and cost effective estate planning structure for you given your goals, objectives, family structure and assets.

This column is based on general principles of Wisconsin law, is for informational purposes only, and is not intended to provide legal advice. Each legal matter must be judged on the merits of its unique circumstances. If you have a legal problem, consult an attorney.

Mark A. Jinkins is an attorney at Pinkert Law Firm LLP with offices in Sturgeon Bay and Sister Bay. 920.743.6505 or 920.854.2616.