Back in May of 2022, I wrote a post explaining What is a Revocable Living Trust. In this post, I would like to focus on how to manage a Revocable Trust. (I will be using the term Revocable Trust and Living Trust to mean the same thing.) In understanding how to manage a Revocable Trust, it is important to consider three time periods: during the life of the Grantor (when the Grantor has capacity), when the Grantor is incapacitated, and after the Grantor’s death.
Managing a Revocable Trust During the Life of the Grantor (When the Grantor has Capacity)
The administration of a Revocable Trust is quite simple while the Grantor is alive and has capacity. Typically, the Grantor will retain complete control over all the assets as if he or she owned the assets outright by acting as trustee of the trust. (The Grantor can choose to have someone else acting as the trustee. However, even then, the Grantor almost always reserves the power to replace the trustee.)
At any time a Grantor may terminate (or revoke) the trust and receive all of his assets back. Since a Revocable Trust acts like a Will, the Grantor also reserves the right to amend any part of the trust, including where the assets go after the Grantor dies.
Step 1 – Understanding Proper Titling of Assets
The purpose of a Revocable Trust is to minimize probate. Minimizing probate makes it easier to administer your affairs after you pass away, and it keeps costs down. Accordingly, the most important part of managing a Revocable Trust is to properly title your assets.
You want to title assets so that they are either owned by the trust or that they filter into the trust upon your death. This may be slightly different from what you have heard. Many people think that the trust must own all of your assets. It isn’t even legally possible to own some assets in the name of your trust while you are alive. If you have a retirement asset, restricted stock, or certain types of business interests, they simply cannot be owned by the trust while you are alive. However, even if something cannot be owned by the trust while you are alive, you can still name your trust as the beneficiary upon your death.
The simple rule to follow is:
- If something can be titled in the trust, try to change the owner to the trust and remove any beneficiary designations associated with that asset;
- If something cannot be titled in the trust, try to change the beneficiary to the trust.
Most lawyers will tell you that the biggest mistake people make in managing a revocable trust is the failure to properly title assets.
Step 2 – Know the Basics of the Trust
Now that you understand the importance of proper titling of assets, let’s review some helpful tips to accomplish this. First, it is important that you understand a few things about your trust. Specifically, you want to know:
- What is the name of the trust?
- When was it executed?
- What is the tax ID of your trust? (It is usually the Grantor’s social security number, but it could be another number you or your attorney got from the IRS).
- Who is the Grantor?
- Who is the Trustee? (Sometimes you also need to know who the backup trustee is.)
- If there is more than one Trustee, can they act separately or do they have to act jointly?
- Does the Trust have any restrictions on the types of assets that can be owned by the trust or any investment instructions?
Many attorneys prepare a Certificate of Trust along with the Trust document. The Certificate of Trust isn’t legally binding, but it usually has all the information above. This makes it very easy to complete bank forms so that you can open up accounts in the name of the trust.
Step 3 – Actually Transferring Assets into the Trust
A trust can own almost any type of asset with the exception of a retirement account. It is also not possible to put assets with restrictions or foreign assets into a trust.
Unfortunately, we do not have a silver bullet answer for how to get all assets into a trust. The practical problem when funding a trust is that every single financial institution has a different form. Moreover, each type of asset has a different way it should go into the trust. For example, if you want to move a house into the trust, you must do a new deed. However, you have a co-op, that might require doing new share certificates and getting permission from the board. Moving a business interest could be just a simple assignment paperwork, or it could require that a managing partner sign off, or it could require a new shareholder’s agreement.
The more complex your financial affairs, the more I recommend working with an attorney to properly manage a revocable trust. Usually, your attorney can assist you with transferring real estate and business interests into your trust. Your financial advisor can typically assist you with traditional stocks, bonds, mutual funds, and bank accounts.
The one big new asset class these days is cryptocurrency. Unfortunately, it is not easy for a trust to directly own crypto. Accordingly, the suggestion that we usually recommend for someone who has significant cryptocurrency is to set up an LLC inside of a Revocable Trust, and the LLC can own the crypto.
Step 4 – Finally – How to Manage a Revocable Trust While the Grantor is Alive
This may sound crazy, but a Trust doesn’t actually own anything. A Trustee owns the assets in a trust. The Trustee is a fiduciary. The Trustee is responsible for carrying out the terms set forth in the trust for the benefit of the beneficiaries. Now that you understand that concept, it should help explain why all bank accounts and titling of assets should be made as follows: “[Trustee Name], as Trustee of the [Trust Name]”. (Sometimes it won’t be possible based upon the forms you fill out, but it is best practice.)
To avoid confusion, a Trustee should always indicate when he or she is acting on behalf of the trust rather than in an individual capacity. Accordingly, checks, letters, and any other documents should be signed as Trustee.
The only other super important aspect to remember is that a Trustee can only benefit the beneficiaries of the Trust. While the Grantor is alive, the Grantor is almost always the only beneficiary. (Occasionally a spouse or child may also be a beneficiary.) Accordingly, if you are the Grantor AND the Trustee AND the beneficiary, you can simply give yourself money whenever and however you wish. There are no restrictions except the ones that you set up for yourself.
Other than those rules and the restrictions set up in the trust, the Trustee can manage the assets just like you would manage any other money. You want to invest in stocks? Go ahead. You want to accumulate cash? Feel free. You want to buy a property and rent it out? You can. If you are the Grantor, you can live in the house or use any asset owned by the trust. Again, the trust can own practically any asset. (Well, the Trustee can, but let’s not quibble.)
How to Manage a Revocable Trust (When the Grantor is Incapacitated)
If a Grantor becomes incapacitated, the most important change is that someone other than the Grantor will need to serve as Trustee to manage the Revocable Trust. Hopefully, the Trust has a good mechanism to replace an incapacitated Trustee. As a practical matter, it is quite hard to remove a Trustee. Removing a Trustee usually requires a Court order or the signature of two doctors stating that the Trustee is incapacitated.
A Trust can also allow a neutral party (often referred to as a Trust Protector) the ability to remove a Trustee. While many Grantors like this concept, I have found that many clients prefer to initiate this feature for backup Trustees. Grantors are reluctant to give a Trust Protector the authority to remove them as Trustee.
In an ideal world, the Grantor/Trustee resigns or names a co-Trustee before they become completely incapacitated.
An important change to the investment strategy may occur when the Grantor is no longer acting as Trustee of the Trust.
Once a Grantor is no longer acting as Trustee, the Trustee may be required to diversify the assets. Many states have a law known as the Prudent Investor Rule. This requires the Trustee to invest in a prudent manner, which includes a duty to diversify assets. This is a higher standard than if the Grantor is acting as Trustee. (Note, most states allow the Trust document to opt out of requiring the Trustee to follow the Prudent Investor Rules. This can be particularly important if the Grantor owns highly concentrated positions in assets or there is a family business.)
There may be reporting requirements when the Grantor is no longer acting as Trustee of the Trust.
Once a Grantor is no longer acting as Trustee, the Trustee may be required to do a regular accounting of the trust. The Trustee should advise the Grantor’s agent and the beneficiaries of the Trust about the assets owned by the trust, the investment performance, and the expenses of the trust.
How to Manage a Revocable Trust (When the Grantor Dies)
Upon the death of the grantor, the trust turns into an irrevocable trust. Even if it’s legally titled as a “Revocable” Trust, it becomes irrevocable. The administration of the trust will be dependent upon the actual terms of the trust instrument. However, in most situations, you will usually need to do the following:
- If the Grantor was the Trustee, the successor Trustee should sign paperwork accepting the responsibility of becoming the new Trustee. (Even if the Grantor wasn’t serving as Trustee, occasionally the document requires a different Trustee upon the Grantor’s death.)
- Obtain a new Tax Identification Number for the trust. (You should no longer use the Grantor’s social security number if that was being used.)
- Work with the financial institutions to ensure the assets in the trust receive a basis adjustment.
- Coordinate with the Executor of the Grantor’s estate if there was a need to do probate. Occasionally, there will be a need to go through the probate process even when there is a revocable trust. Many times the trust is not fully funded or sometimes a Grantor is entitled to a refund after death that requires the opening of an estate.
A Trustee’s Job Is Similar to an Executor’s Job
The Trustee’s job after the Grantor passes is almost identical to the responsibility of an executor. The Trustee must gather the assets, pay the bills of the Decedent, and then follow the rules of the Trust to send the assets to the beneficiaries of the Trust. This process often involves cleaning out a house and selling it, going to banks to re-title accounts, and filing tax returns.
The Trustee must preserve and protect the assets of the trust, and then, depending upon the terms of the trust, distribute the funds outright or set up a new sub-trust for the benefit of the beneficiaries. As mentioned above, the Trustee should provide the beneficiaries of the trust with appropriate information regarding the trust assets.
Unlike trusts created under a Will, the Trustee does not need to acquire Letters of Trusteeship from the Surrogate. This is both a time saver and a small cost saver.
Because every trust is drafted differently and because every situation is different, it impossible to give proper guidance on how to manage a Revocable Trust. However, I do hope you found this helpful. When in doubt regarding the funding of a trust or trust administration, we recommend contacting a knowledgeable local Trust and Estates Attorney.