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.
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Last Update: January 1, 2023