Living Trusts

What is the Vermont Trust Code?

Does a living trust need to be filed with the Probate Court?

Why do my parents have two trusts instead of one?

What is a Credit Shelter Trust?

Can you protect your children's inheritance if you die first and your spouse remarries?

How can I ensure my children receive an inheritance if I die and my spouse remarries?

Can a beneficiary also be a trustee of a trust?

What is a Trust Protector?

What are the different types of Trust Protectors?

Can a Trust Protector also be a Trustee?

What is the role of the Trust Protector when the first spouse dies?

Does a trust have to be set up in advance to be the beneficiary of another trust?

Does a revocable living trust ever become irrevocable?

What is an unfunded living trust?

Q: What is the Vermont Trust Code?

The Vermont Trust Code is a new set of laws governing trusts and trust administration in Vermont that went into effect on July 1, 2009. The Vermont Trust Code is based on the Uniform Trust Code, which has been adopted in approximately half the states in the country. Like most states that adopted the Uniform Trust Code, Vermont made some changes to the language to tailor the Vermont Trust Code to legal practices and conventions in Vermont.

Most of the Vermont Trust Code’s provisions are default rules, meaning that they can be overridden by language in a trust drafted by your attorney. However, certain rules are mandatory and will apply even if your trust states otherwise. For example, the Vermont Trust Code’s provisions impacting how and when beneficiaries of an irrevocable trust must be notified of the trust can be changed according to the wishes of the person making the trust. However, provisions stating that a trust can be created only to the extent that its purposes are lawful cannot be changed, i.e. a trust created for unlawful purposes is not a valid trust.

The Vermont Trust Code updates Vermont estate planning laws in many significant areas, and provides far more flexibility for testamentary trusts and out-of-court trust amendments than was previously allowed. Thus, it’s a welcome addition to the practice of estate planning in Vermont.

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Q: Does a living trust need to be filed with the Probate Court?

No. The only time this might be necessary is if there is a dispute involving a trust document and resolving that dispute requires court intervention. Generally, living trusts remain out of reach of the courts during the grantor’s lifetime, during administration when subtrusts are created or assets are being distributed to beneficiaries, and during any subsequent periods when subtrusts, such as beneficiary controlled trusts, remain in existence. A well drafted trust makes provision for all contingencies that are likely to arise, thus the likelihood of needing to take the trust to court is very small.

One of the primary purposes of creating a revocable living trust is the fact that your family can avoid the expenses, delays and inconveniences of the probate process. If you have a will, or no estate plan at all, your survivors will have to pass through probate every asset that does not automatically pass to someone else through joint tenancy, beneficiary designation or similar operation of law.

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Q: Why do my parents have two trusts instead of one?

In most common law states, including Vermont, estate planning attorneys have historically drafted an individual revocable living trust for each spouse. There was uncertainty about tax implications of a single joint trust, and it was thought that administration of a single trust upon the death of the first spouse would be easier.

Following widespread use of single joint trusts for couples in California, a community property state, joint trusts have become more popular in separate property states too. Through careful drafting, joint trusts can accomplish the same objectives as individual trusts, and are as easy to manage during the administration period following the death of the first spouse. Today, many estate planning attorneys prefer joint trusts because most couples are more comfortable with a single trust that holds their property together, rather than single trusts that require splitting joint assets between the two trusts.

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Q: What is a Credit Shelter Trust?

A credit shelter trust, also known as a bypass trust, is designed to shelter up to one full federal estate tax exemption amount.  All citizens are allowed an exemption from federal estate taxes, which represents the amount that can pass tax free to beneficiaries.  In 2013, the federal exemption amount allows up to $5.25 million in assets to pass to beneficiaries before federal estate taxes kick in.  However, too often people lose their exemption because they do not plan ahead.

For instance, suppose you and your spouse are together worth $7 million, which includes real estate, financial accounts, life insurance proceeds, recent inheritance from parents and various other assets.  If you and your spouse each have a simple will that passes the assets of the first to die to the survivor, the survivor could end up with a $7 million estate, but only one exemption. If the exemption amount hasn’t changed at the time when the survivor dies, the estate may have a federal estate tax liability on the amount over $5.25 million.

One of the principal aims of trusts is to ensure that the first decedent’s exemption is not lost.  By creating a trust to preserve the first decedent’s exemption, money can later be placed in the decedent’s credit shelter trust such that it is not later included in the surviving spouses taxable federal estate. For example, with the couple owning $7 million, half of that might be placed in the decedent’s credit shelter trust, and the surviving spouse’s trust would own the other half. When the second spouse died, their taxable federal estate would amount to only $3.5 million, and thus even if the estate grew in the intervening years, it would be unlikely to exceed the exemption amount of $5.25 million.

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Q: Can you protect your children's inheritance if you die first and your spouse remarries?

Yes, but you have to avoid simplistic estate planning that leaves everything to your spouse if you die first. Most basic wills leave everything to one’s surviving spouse, who may decide how all the family assets are distributed upon their death, because they own everything. Instead of leaving everything to your spouse, you can leave your share of the family assets to your children in trust, but give your spouse limited access to the assets in trust for the remainder of his or her life. That way your spouse has access to the assets so that their standard of living can be maintained, but upon your spouse’s death, the assets pass to your children. This is a common planning scenario where blended families are involved. Blended families exist where one or both spouses has children from a prior marriage.

See the articles: How to Avoid Disinheriting Your Children and The Casserole Brigade on the Articles Page.

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Q: How can I ensure my children receive an inheritance if I die and my spouse remarries?

You can accomplish this through a will or a trust. If through a will, you simply name your children as beneficiaries. Keep in mind that your spouse has a right to what’s known as an “elective share” whereby they can inherit a portion of your estate regardless of what the will states. One problem with the will approach is that if you leave a sizable portion of your estate to your children, your spouse might need to scale back their standard of living. For this reason, many people opt for a trust that is structured so that the surviving spouse has limited access to the deceased spouse’s assets for the remainder of the surviving spouse’s life, but upon the death of the surviving spouse, the assets pass to the first decedent’s children. By creating the trust structure, you are allowing your spouse to maintain their standard of living, while ensuring that the remaining funds eventually pass to your children.

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Q: Can a beneficiary also be a trustee of a trust?

A beneficiary may also be a trustee of a trust, but depending on what the trust is intended to accomplish, you need to be very careful in deciding who the trustee should be.

Beneficiaries also fulfill the role of trustee in two common situations.  First, where the creator of a revocable living trust, also known as the settlor or grantor, is a beneficiary and also trustee of their revocable living trust until they die.  Second, if the deceased settlor drafted the trust to create beneficiary controlled subtrusts upon the settlor’s death, the subtrusts will likely name the beneficiary as trustee for many purposes, but not others, such as distributing funds from the subtrust.

Naming a beneficiary as trustee has many implications that will impact federal and Vermont estate taxes, the degree of asset protection available, and, depending on the potential trustee’s abilities, whether the purposes of the trust are carried out.  Also, be aware that a person cannot be the sole trustee and sole beneficiary, but may be the only current trustee and beneficiary provided successor trustees and beneficiaries are named.

Who is named as trustee of the trust is a central question the trust settlor should not take lightly.  

See the article: Choosing a Successor Trustee on the Articles Page.

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Q: What is a Trust Protector?

A trust protector, also known as a trust advisor, is a person serving in a fiduciary capacity that may amend a trust to bring it up to date with changing federal or state tax laws, change the governing law or principal place of administration of the trust, and perform other specific duties or functions normally completed by a trustee, among other powers. Trust protectors are frequently included in trust documents to add flexibility, particularly where beneficiaries receive their inheritance in trust. Because these beneficiaries’ trusts could be in existence for several decades, it is important to ensure that the trusts can be updated so that they remain current with changing tax and trust laws. Absent the ability to update a trust, the trust may become obsolete and of little practical use. The beneficiary would then lose the benefits of retaining their inheritance in a trust.

Trust protectors are usually given specific powers spelled out in the trust document, although pursuant to the Vermont Trust Code, 14A V.S.A. § 1101, a court or beneficiaries acting in agreement pursuant to provisions in the trust, may empower a trust protector to have specific powers or duties.

Determining who should be the trust protector requires balancing several factors, which is a discussion to have with an experienced estate planning attorney.

See the article: Building Flexibility Into Estate Plans with Trust Protectors on the Articles Page.

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Q: What are the different types of Trust Protectors?

Because trust protectors, also known as trust advisors, have become widely used in domestic revocable living trusts only during the past decade, there is some confusion about what they are, what they do, and why they are needed. In regard to the question above, what are the different types of trust protectors, the differences among trust protectors are really more a question of which powers a trust protector has, rather than what “type” of trust protector they are.

In Vermont, the Vermont Trust Code specifies thirteen powers for trust protectors, including the power to modify or amend the trust instrument to achieve favorable tax status, to take advantage of changes in the rule against perpetuities, to review and approve a trustee’s reports and accountings, to remove a trustee or co-trustee, and to increase or decrease any interest of a beneficiary of a trust, among other powers.

Trust protectors are often a good idea to prevent a trust from quickly becoming inflexible after the trust becomes irrevocable, for example when a client’s living trust is split into beneficiary trusts after the death of the client. If a trust protector is not named, and the tax laws change, which they frequently do, a trust can quickly become out of date and unworkable unless the beneficiary goes to court to have the trust reformed. The problem with going to court is that it is unnecessarily costly and it’s impossible to know if the judge will grant the requested trust changes. Trust protectors all these changes to be made outside of court, which is less costly, more timely, and more predictable.

See the article: Building Flexibility Into Estate Plans with Trust Protectors on the Articles Page.

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Q: Can a Trust Protector also be a Trustee?

Yes, but it would be a bad idea. One role that some Trust Protectors, also known as a Trust Advisors, have is to remove and replace a Trustee under various circumstances. If the Trustee and Trust Protector are the same person, that oversight role would be lost. Additionally, Grantors often try to prevent trust assets from being included in the Trustee’s or Trust Protector’s taxable estate, which would be far more difficult if standard Trust Protector powers were added to standard Trustee powers. In short, these are distinct roles that should be kept separate. Merging them in the same person would likely cause ramifications in many other areas of the trust agreement that would be undesirable to the Grantor, the Trustee and the Trust Protector.

See the article: Building Flexibility Into Estate Plans with Trust Protectors on the Articles Page.

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Q: What is the role of the Trust Protector when the first spouse dies?

The Trust Protector, also known as a Trust Advisor, can have several roles regarding a trust. Principal roles typically include naming a successor trustee where a vacancy exists and the trust document does not specify who should fill that role, and amending an irrevocable trust (or portion of a joint trust) to bring it up to date with new tax laws, fix scriveners errors, or resolve ambiguities in the trust language, among other powers.

Upon the death of the first spouse, presuming a living trust is involved, then either the deceased spouse’s standalone trust has become irrevocable, or the deceased spouse’s portion of a joint trust has become irrevocable. In both instances, the trust document likely names who the successor trustee should be, and the trust document must be followed. So there is probably little or nothing that needs to be done by the Trust Protector immediately. You need to review the trust document to first ensure that provisions were made for naming a Trust Protector, to spell out what powers the trust protector has, and then determine what issues, if any, have arisen with the irrevocable trust that require the Trust Protector’s involvement.

In Vermont, Trust Protectors have fiduciary obligations, so the Trust Protector is advised to consult an estate planning attorney before taking any action, particularly where the action might benefit some beneficiaries over others.

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Q: Does a trust have to be set up in advance to be the beneficiary of another trust?

While it might be possible for a standalone recipient trust to be set up to accommodate a pending distribution from a pre-existing trust, in practical terms the recipient trust must be properly named in the distribution trust in order for the distribution to proceed. If the recipient trust is not properly named, and trust names should include the date of creation, then there is likely to be ambiguity as to what the grantor intended.

Most often, subtrusts spring from a pre-existing trust, for example a married individual’s revocable living trust converts into an irrevocable credit shelter trust, and possibly an irrevocable marital trust. Or, an unmarried individual’s trust converts into irrevocable beneficiary controlled trusts for their children. In these situations, the subtrusts are not set up at the time of the original trust’s execution, but rather come into being upon the death of the grantor.

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Q: Does a revocable living trust ever become irrevocable?

Yes, upon the death of the settlor. But first, a review of terminology. Revocable means that the trust can be amended, restated or terminated by the settlor. The settlor is the person who creates the trust and funds it. Irrevocable means that once the trust is created, may not be amended or restated, but may terminate once there are no longer any assets in the trust.

Most trusts today are known as revocable living trusts, or inter vivos trusts. These trusts are the principal document in most estate plans, and serve as a will substitute. Because they are revocable, they can be amended for specific purposes such as changing beneficiaries or trustees, or restated when the entire document is brought up to date.

Revocable living trusts, however, become irrevocable upon the death of the settlor. When the settlor dies, the terms of the trust cannot be amended. This protects the settlor’s intent and instructions as to who the beneficiaries should be, and when they should receive the trust assets, among other things.

If you have a joint trust with a spouse, then the decedent’s portion of the joint trust becomes irrevocable while the surviving spouse’s portion of the trust remains revocable. This is accomplished by separating the joint trust into separate subtrusts per the instructions in the joint trust. The decedent’s subtrust(s) are irrevocable, while survivor’s subtrust(s) remain revocable.

Some advanced trusts are irrevocable from the outset, such as Irrevocable Life Insurance Trusts (ILIT) principally for tax reasons. Whether a trust is revocable or irrevocable is a key distinguishing feature of trusts, and has many implications you need to be aware of before signing.

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Q: What is an unfunded living trust?

An unfunded living trust is a trust that has been created during one’s lifetime, but funded with only a nominal amount. The rationale behind an unfunded living trust is to have the trust ready to receive assets after the death of the settlor (i.e. the person who created the living trust), but not cause unnecessary inconvenience to the settlor while they are still alive.

In the case of an unfunded living trust, the settlor’s assets would pass through probate then, via a pour-over will, be placed in the living trust, which became irrevocable upon the settlor’s death. The trust assets would then be held for or pass to the beneficiaries as determined by the terms of the trust.

For most people, the better path is a funded living trust, in other words, a living trust set up during the settlor’s lifetime that holds nearly all of the settlor’s assets from the time the trust is created. A fully funded living trust avoids having to go through probate later. Additionally, one of the big advantages of funded living trusts is that a successor trustee can manage the settlor’s assets if the settlor becomes incapacitated. This avoids having to petition the probate court to be named conservator for the settlor in order to receive the court’s approval to act on behalf of the settlor.

While some would have you believe that funding a living trust and managing the funded living trust is an inconvenience, or worse, the truth is otherwise. Initial funding is usually handled by the estate planning attorney, and managing trust assets in a trust is little different than managing assets outside of a trust. Thus, the benefits of a funded living trust far outweigh the alleged inconvenience. It’s best to avoid probate and cover yourself during incapacity by having your assets in the living trust from the very beginning. If your attorney suggests otherwise, seek a second opinion from an attorney that focuses solely on estate planning.

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