Tusts in Estate Planning-Intervivos Trust

USE OF TRUSTS IN ESTATE PLANNING

WHY CREATE A REVOCABLE GRANTOR INTERVIVOS TRUST?
BY
MICHAEL J. LOMBARDO, ESQ.

People often ask whether a trust should be part of an estate plan. In this article, we will explore what a Revocable Grantor Intervivos Trust can and cannot do for you, and under what role a Revocable Grantor Intervivos Trust may play in an estate plan. If you do not have a general familiarity with trusts, you should read the article Use of Trusts in Estate Planning-What Is a Trust? before reading this article.

WHAT CAN A REVOCABLE GRANTOR INTERVIVOS TRUST DO FOR ME?

There are many reasons why a person may want to create a Revocable Grantor Intervivos Trust. Some of the more popular reasons for creating a Revocable Grantor Intervivos Trust are:

AVOID PROBATE

Avoiding Probate For the Sake of Avoiding Probate

One popular reason for creating a Revocable Grantor Intervivos Trust is to avoid probate. However, avoiding probate for the sake of avoiding probate in New York out of fear that an estate will be tied up for years or diminished by substantial fees is generally not an issue for probate in New York. Probate in New York is not as extensive a process as it is in some other states. In fact, if all parties involved cooperate, and no estate tax return is required to be filed, an estate of less than $6,580,000 can generally be distributed to the beneficiaries of the estate after the estate has been open for 7 months. Of course, a more complex estate or an estate required to file an estate tax return may take longer. However, even with a more complex estate there is still the possibility of making a partial distribution to the beneficiaries before the estate is required to be closed. This is an evaluation that the attorney representing the executor or administrator of the estate can assist with. If you are interested in learning more about the probate process in New York, please see the article Probate in New York.

Concern That There May Be a Challenge to a Will

Even though the probate process in New York is not as complicated as it might be in other States, there is an advantage to creating a Revocable Grantor Intervivos Trust where there is a concern that there may be a challenge to the validity of a Will by a disgruntled individual left out of the Will who would stand to inherit assets if there was no Will. It may be possible to avoid the probate process that invites challenges to the Will.

Real Property Located in another State

Another situation where avoidance of probate may be desirable is where real property is owned in another State. If the real property is owned outright at the time of death, ancillary probate proceedings may have to be brought in the State where the real property is located. The probate process of the State where the real property is located may be more complex than the probate process in New York, thus adding time and expense before the estate assets can be distributed.

Desire to Avoid Appointment of a Guardian

If a minor (i.e. someone under the age of 18) is a beneficiary under a Will, the Surrogate’s Court will customarily appoint a Guardian Ad Litem to protect the interests of the minor. This adds to the expense of the administration of the estate. Use of a Revocable Grantor Intervivos Trust that makes provisions for minors rather than making provisions for minors under the Will may save the expense (and additional time for probate) that may be incurred should the Surrogate’s Court determine that a Guardian Ad Litem should be appointed.

PROTECT PRIVACY

Privacy is a concern to many people. When a Will is probated, the Will is available to the public to see and read. If there is a concern about the types of assets or amounts being distributed to an individual or class of individuals that are referred to in the Will, or who will inherit the estate, consideration should be given to creating a Revocable Grantor Intervivos Trust. However, interests in various assets are a matter of public record, such as a deed to a house, but many assets are not, such as stock ownership. You should discuss these issues with your attorney when developing your estate plan to help evaluate how much privacy you are protecting by creating a Revocable Grantor Intervivos Trust.

PROVIDE ASSISTANCE SHOULD THE GRANTOR BECOME INCAPACITATED

An advantage of creating a Revocable Grantor Intervivos Trust is to provide for someone else to control assets should the grantor no longer be able to handle his or her own affairs. The document creating the trust usually contains a provision that should the grantor become incapacitated, the grantor appoints a particular person or persons to take over as trustee of the trust. This then avoids the necessity of bringing a court proceeding to have a Guardian appointed to handle the grantor’s financial affairs. If this is the only reason for creating a Revocable Grantor Intervivos Trust, consideration should be given to using a Power of Attorney instead of a Revocable Grantor Intervivos Trust due to the costs involved in setting up and transferring assets to a Revocable Grantor Intervivos Trust as compared against the preparation and use of a statutory Power of Attorney. However, a Revocable Grantor Intervivos Trust can provide powers to the trustee that may be more extensive than powers provided under a statutory Power of Attorney.

WHAT CAN'T A REVOCABLE GRANTOR INTERVIVOS TRUST DO FOR ME?

There sometimes expectations that a Revocable Grantor Intervivos Trust will be able to do more than it actually can. Some things a Revocable Grantor Intervivos Trust CANNOT DO are:

PROTECT ASSETS FROM CLAIMS OF CREDITORS

People are sometimes encouraged to put their assets in a Revocable Grantor Intervivos Trust under the mistaken belief that the assets placed in trust will be protected against the claims of the grantor’s creditors. I have seen many real estate investors do this, only to find out that the assets used to fund a Revocable Grantor Intervivos Trust are not protected at all from claims of tenants or others injured on the property. If there is a desire to place assets in trust for the purpose of protecting the assets against claims of creditors, then an Irrevocable Grantor Intervivos Trust should be considered, provided the transfer is not considered in defraud of creditors. However, the trade off is that the grantor will lose control over the assets placed in an Irrevocable Grantor Intervivos Trust, income is generally taxed at higher rates than income received through a Revocable Grantor Intervivos Trust and the trust can be challenged should the funding of the Irrevocable Grantor Intervivos Trust be made while the grantor is being sued, owes money that cannot be repaid or is for the purpose of defrauding the grantor’s creditors. Also, using real estate to fund an Irrevocable Intervivos Trust may result in an acceleration of any mortgage that may encumber the property at the time the property is transferred to fund the Irrevocable Grantor Intervivos Trust. The consequences of creating and funding an Irrevocable Intervivos Trust should be discussed with your attorney and evaluated carefully before making this decision.

REDUCE ESTATE TAXES

The assets used to fund a Revocable Grantor Intervivos Trust are treated as if the assets are owned outright by the grantor upon the death of the grantor for estate tax purposes. A Revocable Grantor Intervivos Trust has absolutely no advantage in an attempt to save estate taxes. There may be certain types of Irrevocable Intervivos Trusts that may help save estate taxes. These will be discussed in more detail in a future article.

REDUCE INCOME TAXES

A Revocable Grantor Intervivos Trust pays no income tax (and generally is not required to even file a tax return during the life of the grantor). The grantor will report on the grantor’s individual income tax return all income received by the trust as if the assets were owned outright by the grantor. Therefore, there is no income tax savings in the use of a Revocable Grantor Intervivos Trust.

OTHER DISADVANTAGES

Some disadvantages of having a Revocable Grantor Intervivos Trust could include the following:

PROBATE MAY STILL BE NECESSARY

One of the advantages to creating a Revocable Grantor Intervivos Trust is to avoid probate. If after the Revocable Grantor Intervivos Trust is created all assets are not properly transferred to the trust, those assets not transferred will have to be administered following the grantor’s death. If the grantor has a Will, then the assets will be administered in accordance with the terms of the Will. If the grantor does not have a Will, then the assets will be administered in accordance with the laws of intestacy of New York. In either case, it will be necessary for there to be a probate proceeding.

POTENTIAL LOSS OF PRIVACY

Although a Revocable Grantor Intervivos Trust does not get probated, it should be pointed out that if there is a Will in addition to a Revocable Grantor Intervivos Trust and the Will contains a pour over provision (i.e. assets passing under the Will are to be paid over to the trust on death), the Court may require that the Revocable Grantor Intervivos Trust be filed with the Will. The Revocable Grantor Intervivos Trust then becomes a matter of public record and can be inspected by anyone. See also Special issues if real estate is an asset of the trust below.

SPECIAL ISSUES IF REAL ESTATE IS A TRUST ASSET

There are special problems with using a Revocable Grantor Intervivos Trust to hold an interest in real property. Some lenders will not lend to a Revocable Grantor Intervivos Trust and if a mortgage is to be placed on real property, the lender may require that the property be transferred to the grantor before the loan will be made by the lender. In addition, there may be a loss of privacy if the Revocable Grantor Intervivos Trust sells the property and the terms of the Revocable Grantor Intervivos Trust must be disclosed in order to close the sale. This then affects the viability of the estate plan to the extent the estate plan includes a Revocable Grantor Intervivos Trust for at least some real property that may be owned by the grantor.

CETRTAIN ASSETS MAY BE DIFFICULT TO TRANSFER

The Revocable Grantor Intervivos Trust is effective and operative only if the assets owned by the grantor are transferred to the trust. However, certain assets may not be so easy to transfer to a Revocable Grantor Intervivos Trust, such as an automobile. A careful analysis should be made as to the assets to be transferred to the Revocable Grantor Intervivos Trust and whether the transfer will present special problems that need to be addressed.

TRUST MAY STILL BE CHALLENGED

One of the advantages to creating a Revocable Grantor Intervivos Trust is to avoid a potential challenge to a Will and therefore the manner in which assets are to be distributed following death. However, the level of competency to execute a trust is greater than that of a Will and therefore it may be easier to challenge the validity of a Revocable Grantor Intervivos Trust than a Will. Although the validity of trust can be challenged, upon the grantor’s death there is no court procedure required before the trustees can carry out the wishes of the grantor, and therefore there is no proceeding inviting a challenge to the Revocable Grantor Intervivos Trust. It may be more expensive for the challenger to challenge the validity of the Revocable Grantor Intervivos Trust which may dissuade a challenge.

TRUSTEE CAN STILL BE SUED BY BENEFICIARIES

The trustee is in charge of administering the assets placed in the Revocable Grantor Intervivos Trust. If the trustee does not act in a prudent manner that is beneficial to all of the beneficiaries, those beneficiaries that have been damaged may have a claim against the trustee. While this is also true of an Executor, the trustee must make decisions based on the trustee’s belief of what is in the best interest of all beneficiaries without the benefit of a court approving the action before the trustee acts. If the trustee is wrong, the trustee may be personally liable. If an Executor under a Will wants to take certain actions, the Executor has the ability to seek an approval from the Surrogate’s Court before taking action. If the Executor does obtain prior approval for an action from the Surrogate’s Court, the Executor is protected from the claims of beneficiaries for the actions taken that were approved by the Surrogate’s Court.

COSTS

There are several cost considerations to review before deciding to create a Revocable Grantor Intervivos Trust. Some of these costs are as follows:

Cost of creating and transferring assets to the Trust. These costs should be weighed against the goals to be achieved by establishing a Revocable Grantor Intervivos Trust. Sometimes, these costs could far exceed the cost of making a Will. However, if use of a pre-printed kit is being considered in an attempt to save the cost having an attorney prepare the Revocable Grantor Intervivos Trust, care should be taken since there may be an issue as to whether the Revocable Grantor Intervivos Trust created by use of the kit complies with New York law (See Estate of Pozarny, 677 N.Y.S.2d. 714 (1998)).

Commissions. A trustee, like an Executor, is an entitled to a commission for assets administered following death. However, a trustee is entitled to an annual commission for administering assets of the trust before the grantor’s death. If the grantor is the trustee, this is not an issue because the grantor will not charge a fee. However, if the grantor is unable to administer the assets of the Revocable Grantor Intervivos Trust, there will be an additional expense to the trust unless the trustee agrees to serve without compensation. Therefore, overall commissions that might be incurred must be weighed against the benefits of creating a Revocable Grantor Intervivos Trust.

CAUTION: THIS ARTICLE IS INTENDED TO PRESENT GENERAL INFORMATION AND IS NOT INTENDED TO BE A SUBSTITUTE FOR CONSULTATION WITH LEGAL COUNSEL.

IRS CIRCULAR 230 Disclosure: To ensure compliance with requirements imposed by the IRS, please be aware that any U.S. federal tax advice contained in this communication (including any attachments or enclosures) is not intended or written to be used and cannot be used for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to any other person any transaction or matter addressed herein.

Last Update: January 1, 2023