What is a Revocable Living Trust?
- “Revocable” means that the creator of the trust can change or terminate the trust at anytime and for any reason.
- “Living” means the creator of the trust made it during their lifetime.
- A “Trust” can be thought of as an envelope that holds all the property the trust creator owns, contains instructions on what should happen with this property, and is addressed to the people the trust creator wants to get the property inside, which is then handed off to the Trustee who acts like a mail carrier and delivers it to the addressees.
Trusts Broken Down
At New Chapter Legal we think trusts are unique and fascinating things. Trusts are also a deceptively simple concept but tend to appear complicated just because of the legal terms used. There are many different types of trusts and the words “revocable” and “living” are adjectives that describe a particular type of trust.
“Revocable” means that the person who created the trust can change the terms of the trust or terminate the trust completely so it ceases to exist, at any time and for any reason. This is in contrast to an “irrevocable” trust that has restrictions on if, when, and how the trust can be changed or terminated. A common misconception is that an irrevocable trust can never be terminated or changed for any reason, but it actually depends on what the terms of the trust say, state law, and other circumstances, like why, how, and who wants to change or terminate the trust.
“Living” just means that the trust is created by a person while they’re living. If you ever see the term “inter vivos” this means literally the same thing, it’s just the Latin words for “during life.” The opposite of a “living” trust is a “testamentary” trust, which means a trust that’s created when a person passes away. There’s too much to say about testamentary trusts to discuss here, but these unique types of trusts will be explored in a future blog post.
The rest of this blog post is dedicated to explaining the last word, “Trust,” in two different ways, depending on your level of curiosity. First, with minimal legal language by thinking about a trust as an envelope. Second, by breaking down the legal terms used in the typical definition you’ll see if you search “What’s a trust?” online.
Please be aware that the explanations below are specific to Revocable Living Trusts as they’re used for estate planning purposes and as drafted by New Chapter Legal. Additionally, the second explanation is still an over-simplification and is not intended to be a comprehensive discussion of trust law.
A. Non-Legal Explanation: A Trust is Like an Envelope
A Trust is like an empty envelope. Once a person creates their envelope (i.e., signs their trust document) they must fill it up with the assets they own, such as their house, car, and bank accounts (which is called “funding” the trust). The envelope is addressed to all the people (i.e., beneficiaries) who should get the assets in it now or in the future.
The envelope’s creator also writes detailed instructions tucked inside (i.e., the terms of the trust) about when and how it should be delivered to the people it’s addressed to. Then this envelope is handed to a mail carrier (i.e., the Trustee) for delivery, who must keep it safe, follow the instructions, and make sure the assets inside get delivered to everyone properly.
The unique thing about a Revocable Living Trust is that so long as the creator of the envelope is alive and is not incapacitated, they are both an addressee and the mail carrier (i.e., both a beneficiary and the Trustee). This means that the creator writes the instructions and also must follow them, must keep the envelope safe, and must deliver the assets inside to themselves. The result of all this is that the person who creates a Revocable Living Trust still owns and can use all their assets as if they didn’t have a trust. If any assets inside the envelope generate income, such as interest or dividends, then they still get reported on the creator’s personal income taxes.
If the creator becomes incapacitated or passes away, the envelope gets automatically handed off to another mail carrier of their choosing (i.e., the Successor Trustee). Once everything inside the envelope is delivered to the people it’s addressed to, the mail carrier’s job is done.
Since the envelope is automatically handed off, all the creator’s assets are already collected inside it, and there’s detailed instructions about how the assets should be delivered, there’s no need for the probate court to get involved (i.e., the trust avoids the probate process). Plus, since the instructions are tucked inside, the only people who can read them are the mail carrier (i.e., the Trustee) and the people the envelope’s addressed to (i.e., the beneficiaries), so they stay private.
If you’d like to learn more about Revocable Living Trusts or if you’re interested in creating a Revocable Living Trust, please reach out to Attorney Veronica DeSantis.
B. Legal Explanation: A Trust is an Agreement
A Trust is an agreement made between a Settlor (sometimes called a Grantor or Donor), who is the creator of the Trust, and a Trustee, who is in charge of managing the trust. The Settlor and Trustee can be two different people, but they can also be the same person. Under New Hampshire law, the agreement between a Settlor and a Trustee can be made orally or in writing, but a Revocable Living Trust created for estate planning purposes should always be in writing. There are a few different reasons for this, but they’re outside the scope of this blog post and will be addressed in a future post.
If the agreement between the Settlor and Trustee is in writing, then this document is typically called a Declaration of Trust. However, the “trust” is technically the agreement itself and not this physical document. To form this agreement, the Settlor basically offers someone (this can be a person or an entity like a bank) the job of Trustee, and if the person accepts then they become Trustee and a trust is created. In return for accepting the job of Trustee, the Trustee can (or can choose not to) receive reasonable compensation for their services, which is paid from the assets held in trust.
The Trustee’s job responsibilities include holding, managing, keeping safe, and using the Settlor’s property, but only as specified in the terms of the Declaration of Trust. The Trustee isn’t allowed to take and use the Settlor’s property for their own personal enjoyment. Rather, the Trustee must use the property for the benefit and enjoyment of the people the Settlor specifies in the Declaration of Trust, who are called Beneficiaries. Just as sometimes the Settlor is also the Trustee, the Settlor can be a Beneficiary as well.
In order to hold and manage the Settlor’s property, the Trustee has to legally own it. So, the Settlor must legally convey their property to the Trustee, such as by titling it in the Trustee’s name (for example, as “Martha Washington, as Trustee of the John Smith Revocable Living Trust”). Property that’s titled in the Trustee’s name is said to be “held in trust.” Since a trust is an agreement, there is no separate trust entity that can legally hold property. Where this gets confusing is that sometimes a trust is considered a separate entity or a person besides the Trustee is considered the owner of trust property for tax purposes. Additionally, it’s common to refer to all property held in trust as the “trust fund,” “trust body,” or “trust corpus” (corpus is just the word “body” in Latin).
Since the Trustee is the legal owner of the property rather than the Settlor, the property held in trust doesn’t go through the probate process when the Settlor passes away.
The Settlor is obviously placing a great deal of trust in the Trustee, and the Trustee has a lot of responsibility. The Trustee has certain legal duties to do right by the Settlor and the Beneficiaries and to keep good records, which are called fiduciary duties. A Trustee who violates any of their fiduciary duties can be taken to court or face other consequences.
In a typical Revocable Living Trust used for estate planning purposes, the Settlor is both the Trustee and the Beneficiary while they’re alive. In the terms of the Declaration of Trust, the Settlor specifies who should be Trustee instead if they’re ever incapacitated or if they pass away. The Declaration of Trust is a private document because the only people who have the right to get a copy are typically the Trustee and Beneficiaries.
The content of this blog post is for informational purposes only and may not reflect current developments in the law. Do not make decisions based on the content of this blog post without consulting a lawyer first. Nothing in this blog post should be interpreted as guaranteeing any future result. Viewing this blog post does not create a lawyer-client relationship.