By Tim Barkley. February 2013.

One of the most commonly employed planning tools on today’s estate planner’s workbench is the revocable living trust. Revocable. Living. Trust. Separate ideas rolled into one planning tool that might be right for you.

A TRUST is a separate legal entity, like a business. Just like you might set up a corporation and control the corporation as sole shareholder, in the same way you can set up a trust and retain control of the trust as Trustee.

You decide when you give up or share control – at your death or incompetence, or upon resignation as Trustee – and how to exercise your control over your trust.

Some clients have unpleasant or uncomfortable reactions when first introduced to the idea of a trust. “Does that mean I have to give everything to a bank?” queried one couple. Absolutely not. Another objected, “I won’t do it. I won’t give up control over my stuff.” But he wouldn’t lose control. A third said, “All I need is a simple will.” Actually, she needed a trust for her disabled son.

A trust is like a bucket. You set up a trust, and transfer title to property to the trust – put “stuff” in the bucket. As long as you are alive and competent, you control the trust – you carry around the bucket, and add or remove things at your pleasure. No one can call you to account for your trust management. When you . . . um . . . “kick the bucket,” your successor trustee manages the trust according to what you directed in the trust document. Things are kept in or poured out of the bucket when, as and for the purposes you directed. That’s all.

The trust is REVOCABLE. You can change it, add to its terms, or make it go away entirely. It is entirely up to you. Because the trust is revocable by you, there is no separate tax return for the trust, and you don’t have to answer to anyone for your management of the trust.

The LIVING trust is set up while you are alive, and you transfer assets to it and control them through the trust. If you become disabled or incompetent and unable to manage your assets, a living trust is by far the most effective tool available for your chosen successor Trustee to use to manage your assets for your benefit – paying your bills, administering your affairs.

And a living trust avoids probate. Only what you own in your own name at your death goes through probate, so whatever you control through your trust avoids probate.

Probate avoidance is only one of the advantages of a living trust. There are many other reasons for using trusts, whether a living trust or a trust in your will, or “testamentary” trust. You can employ a trust to provide assets to raise your children, to realize your charitable intentions, to avoid taxes and to support disabled or spendthrift children without allowing them to own the assets.

If you die leaving minor children, your assets cannot be given to your children directly. If you have not set up a trust, the court will set up a “custodianship” to hold your assets.

One of the principal disadvantages of custodianship is that the court – not you, the parent – sets the terms of the custodianship, and, by law, your child must receive his or her share by age eighteen. Most of my clients do not consider that a responsible age to receive a significant inheritance. A trust is the best way to make your assets available to your children while protecting them as they are maturing.

Another disadvantage of custodianship is that the custodian must account to the court every year for the management and expenditure of the assets, a troublesome, time-consuming and potentially costly process. A trust is private.

If you are leaving an inheritance to a disabled child or supporting a disabled parent, your assets might be spent for care that would otherwise be provided by the state. If you are leaving money to a spendthrift child, your hard-earned resources might only fuel his irresponsibility. A trust is the simplest tool to preserve your assets and ensure that they are only spent for appropriate, responsible causes.

There are other reasons to use a trust, among them, tax and charitable gift planning, second marriage concerns, and business planning. The next time your advisor mentions a trust, consider the benefits, and decide for yourself, based on your own needs and situation.

Next issue: Care and feeding of your living trust.


Attorney Tim Barkley
The Tim Barkley Law Offices
One Park Avenue
P.O. Box 1136
Mount Airy
Maryland 21771

 (301) 829-3778

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