What is a Revocable Living Trust?
Just a Contract
Revocable Living Trusts (RLTs) are one of the most common estate planning tools. A trust is just a contract. And RLTs are a rather off form of contract. In most contracts, there are at least two people who are agreeing to do or not do something in exchange for a promise that the other person will do or not do something. But in an RLT, the contract is between you as the Grantor (person establishing the trust), you as the Trustee (person managing the trust), and you as the beneficiary (the one who benefits from the trust). I can write up a contract between me and myself where I promise myself that I’ll eat healthy and exercise more, but when I violate that contract this weekend, I can’t sue myself. An RLT doesn’t really do anything while you are alive and competent.
But you will not remain the trustee forever. There are two situations that would cause you to be removed as the trustee of your trust and someone else to step into that role. First, if you were to become incapacitated in life, you will no longer serve as Trustee. You remain the grantor and the beneficiary, but someone else becomes the new or successor trustee. That person now owes you a duty to do and not do certain things under the RLT. Second, you will eventually pass away (sorry). And when that happens there will be new beneficiaries and a new trustee. The beneficiaries are entitled to some things, but not other things in the trust agreement. The successor trustee now owes a duty to you as the grantor and to the new beneficiaries. And the trust changes in a key characteristic. Once you are gone, the trust becomes irrevocable. That means it cannot be changed but now there are some additional protections in place because the money that was put into trust can only be used in certain ways for certain people. We will discuss these protections more below.
General Needs Trust for Children
When we create an RLT for an individual or a married couple with kids, the vast majority want their assets to go to their kids when they and their spouse are gone. But because we don’t know when you will pass away, we have no idea whether your kids will be able to inherit your assets and then manage them. As a result, we start off with a General Needs Trust for descendants. This allows the Trust to manage money on behalf of children unless and until they are old enough (I use 25 years old as the default for adulthood, but we can change that), are competent, don’t have creditors, or bankruptcy, and are not receiving needs-based government benefits. Once a child reaches each of these requirements, we allow them to serve as their own trustee and also withdraw as much as they want from their trust. As we will learn below, hopefully they have the sense to keep assets in trust because the trust will protect those assets moving forward. This is the first level of protection though; not allowing kids to manage their own money until they are old enough to do so. While the default is 25 years, many clients decide to use things like graduated distributions where a child is entitled to withdraw or direct the spending on a certain percentage of their inheritance when they reach certain ages. My trust, for example, allows my boys to control 20% at age 25, but not everything until they are 30. I may also decide to change this as they get older. It’s hard to imagine them being mature enough to make sound financial decisions right now.
Special Needs Trust / Medicaid Planning
Another component of almost every RLT I’ve drafted is a conditional Special Needs Trust (SNT). An SNT arises when a beneficiary is receiving needs-based government benefits. One of the more common benefits applicable to this situation is Medicaid. Where a person cannot afford something like long-term care, they may apply for and receive Medicaid who will cover the portion of long-term care that the person cannot afford. However, this program is generally only available to people who do not make enough money or have sufficient assets to pay for the care on their own.
As a result, if an individual who has been applying for or receiving Medicaid suddenly come into a pile of money, they are no longer eligible for Medicaid and Medicaid may take as much of that money as needed to repay themselves for anything spent on the person during their lifetimes. If you have a car accident that results in your death and your child receives a debilitating traumatic brain injury, they may need intensive long-term care. That care can easily exceed $20,000 per month. If the child has no other assets, they may be eligible to have Medicaid pay for that. But if they inherited money from you, they would have to spend all of it on their care before Medicaid stepped in. An SLT prevents that. It requires that any money that goes to someone who is receiving or applying for those benefits be held in a separate trust that can only be used for things that the government is not paying for and prevents the government from counting it as an available asset or seeking to take that inheritance. This simple tool could save millions of dollars of inheritance and benefits and allow that money to pay for a higher level of care and things that the government would not otherwise provide.
All trusts we draft also include provisions to keep bankruptcy courts and creditors out of the inheritance. If your beneficiary owes people money, they could lose a large portion of their inheritance. By using an RLT with spendthrift provisions, we can keep those creditors out. Even the best of us can get into trouble. A car accident can result in a large judgment against a driver. Couples get divorced. Businesses can go belly up. Investments can sour. Even if you think there is no way your angelic child would ever get into debt, having this protection could end up more important than you imagined.
As discussed above, another key component of an RLT is that ability of the Grantor to structure for what, when, and how their inheritance is distributed. Because a trust is just a contract, we can do just about anything you imagine with the distributions. That may be as simple as giving the Trustee the broad authority to decide until your child or beneficiary is an adult, or it may include more specific and creative restrictions. Many people use a graduated distribution where the Trustee can make distributions for health, education, wellbeing, and support, but the beneficiary can only access a percentage of trust funds beyond that each year with a higher and higher amount or percentage as they age (and hopefully mature). My trust grants my kids 20% at age 25 and the rest at age 30, but other clients use a yearly allowance of $5-10,000 each year until the beneficiary is older.
Another common restriction involved requiring that the child graduate from college or be employed full time. Some people are more concerned with drugs and alcohol or attending religious services. While the potential restrictions and incentives is unending, we would want to run through some potential scenarios to be sure that the language we use takes into account the unforeseeable.
We may want to meet several times and tweak language until we are all confident that it will serve the purposes you’ve got in mind. Because I charge flat fees, we can meet as many times as you need to without having to worry about an hourly charge racking up a huge fee. If you don’t use our office, this is something you should consider when selecting an estate planning attorney. Lawyers are long winded and capable of making the simple more complex. Charging by the hour can incentivize your attorney into dragging the process out or not helping you make decisions.