This is episode 19 – revocable living trust essentials, the 10 must-have provisions for success. Today we want to talk about revocable living trust. Many of you know that it is my preference to avoid the probate court process and the way we avoid the probate court process most of the time is through the utilization of trust and today we want to talk about how you can simplify things for those who come after you should you become either incapacitated or pass away. We are going to talk about revocable trust and I want to identify if you are going to create a trust, what are the 10 must-have provisions that should go into every single trust?
Well, first of all, if we are doing a revocable trust, right up front, the trust document number one needs to state that the trust is revocable. We do not want there to be any confusion about that. So the best thing to do is to simply identify that right upfront.
Number two, we want to identify the individuals who are involved in the trust, we will want to name the grantor, the initial trustees, the disability trustees, and what I call the death trustees. Sometimes people refer to these as the successor trustees. Well, the grantor of the trust can either be a single person, or more than one person, a married couple can have a trust, and each of them will be considered to be a grantor. Some people refer to it as the settlor. I like to refer to the grantors as the trust makers. Whether you call them grantor, settlors or trust makers, what’s critically important is we identify them by name. My preference is to use their full legal name, but I have learned in this business, that a lot of folks go by something other than their original legal name. Yours truly, my official legal name is Theodore G. Gudorf, but I go by Ted Gudorf. So, when we are identifying who the trust maker of my trust is, we are going to want to say Theodore G. Gudorf, also known as or aka Ted Gudorf. Now we are going to want to do that with respect to our grantors, and then our successor trustees as well. Now, we want to make sure that we understand whether they are to serve collectively together if we need more than one person, or whether one is to serve than another will serve. By the way, there is no reason not to name more than one person as your trustee. Some lawyers fret over that, I have never had a real problem with having multiple individual service trustees, particularly if they are serving as successor trustees, but that is something for you to consider.
More importantly, for purposes of today, we want to make sure you name who they are. Also, we want to understand who are the income beneficiaries of the trust, if you are going to be an income beneficiary, if your spouse is going to be an income beneficiary, we want to set that forth within the trust document, then we want to identify who are the beneficiaries of trust principals, who can receive specific transfers from the trust, who are those beneficiaries? For instance, if you become incapacitated, you are probably going to want to be an income and principal beneficiary.
Number two, if you are incapacitated, you are probably going to want your spouse and maybe your dependent children to also be beneficiaries of income in principal, really important to be very clear over who are our income and principal beneficiaries, both during our lifetime and after our death.
Now, early on in the trust document, it is advisable to include a provision which specifically sets forth the date of the trust. Now we have a particular naming convention that we like to put in our trust, but just suffice it to say, that happens to be our law firm and probably most law firm’s way of naming your trust. Oftentimes it would be something like Theodore G. Gudorf Trustee of the Theodore G. Gudorf Revocable Trust dated so and so, that is a common way to identify the name of the trust, but it does not have to be. I had a client the other day simply wanted to name their trust the RSV Trust dated so and so, that is permissible, it does not have to include your name. There are those in the business who suggest that you not include your name. That is one way to gain a little bit more confidentiality with respect to your trust is by having it have a name other than your surname. So, by clearly upfront stating the name of the trust is a critical provision.
Let’s talk about provision number six, a spendthrift clause. What is a spendthrift clause? Well, it’s a simple provision that gets inserted in the trust that prevents a lifetime or death beneficiary from being able to pledge their future inheritance or perhaps even their current inheritance, to get a loan or for any creditor purposes, and that prevents a creditor in the future from bringing an action to invade the trust assets, if they have a claim against the beneficiary. So almost every trust I have ever reviewed, has a spendthrift clause in it to protect the trust assets from the beneficiaries, creditors. So that’s an important provision. Another key important provision is to include a what I call a no-contest clause within the trust. Well, how does that operate? Well, normally, the way a trust gets challenged, is that some disinherited heir, or someone who receives less than what they think they are going to get, files a court action, claiming that at the time the trust was created, the trust maker lacked capacity, or was unduly influenced by somebody who got more out of the trust document. Those are the two primary challenges to address that we see. Well, if a beneficiary is going to forego anything they are getting in the trust, by way of the no-contest clause, if they are unsuccessful challenging the trust document, the no-contest clause will likely prevent somebody from filing such an action, because the no-contest clause says if they file an action and challenge your capacity, or allege undue influence, and they lose, they forego all of their inheritance, they lose it completely and under Ohio law, a no-contest clause, well not favored under the law, is enforced by our probate courts rather routinely. So more often than not, most trusts are going to include a no-contest clause as a way of preventing any future litigation with respect to your capacity or any undue influence, so we recommend a no-contest clause.
Also, an important provision in a trust that is oftentimes overlooked, is how are we going to determine whether the trust maker has capacity or not, such that they should no longer be a trustee, and the successor trustee should now step in and handle things? Well, when we draft trust, it is important to include a provision that says who is going to make the decision whether the trust maker is finally incapacitated? Who is going to make that decision? Is it going to be a spouse? Is it going to be a child? Is it going to be a panel of people? Does it require an attending physician, a family physician? How about somebody who is trained within the business of declaring people to be incapacitated, you have the ability to say who can declare you to be incapacitated? More often than not on our trust, we have a spouse and an attending physician, that’s a common provision and if the spouse is not available, oftentimes we are going to name one or more of the children to serve on what we call a disability panel. You should also say with respect to the panel if there is more than two people involved in it, whether it requires an unanimous decision from all members of the panel or a majority decision, so figuring out how we are going to declare incapacity is very important.
In addition to determining whether you are incapacitated or not, we should include some provisions within the trust document that say how trust assets can be utilized during any period of time that the trust maker is incapacitated. For instance, do we want the trust assets to be available to the trust maker who is now incapacitated, perhaps to provide care for them at home, or an assisted living or the nursing home? Do we want the trust assets to be able to also be utilized for a spouse or for dependent children? If we would like that, we should include those kinds of provisions and there is no reason why we can’t go into significant detail to provide our successor trustee with some guidance in terms of how we would like to be cared for in the event of our own incapacity, and that it is okay to utilize trust funds for that purpose.
Well, the 10th very important provision, to be included within a revocable trust, as well as an irrevocable trust, is to consider either naming a trust protector or trusted advisor, or making provisions for someone typically an attorney to make an appointment of a trust advisor. Well, what does a trust protector or trust advisor do? Well, it precludes us from having to go to probate court to modify the trust document, for instance, if there is a need to change the trust. What would cause us to need to change the trust? What if we need to remove a trustee? What if we need to appoint a new trustee? What if the tax law changes, and we are able to modify the trust in the future to make it more tax friendly? Or what if there was a Scrivener error within the trust document, and we simply need to fix it, or what if we want to grant someone what we call a power of appointment, a trust advisor or a trust protector can do all of these things and much more and save substantial dollars in the administration of the trust, because it will preclude us from having to go through a lengthy court process to modify a trust document. This is particularly helpful in those instances where we are doing multigenerational planning and we have sub trusts that are being created within the trust that are expected to maybe last for 30, 40, 50 years or longer. So adding a trust advisor provision is a good thing to do and important thing to do.
Now, in addition to setting up our revocable trust with these 10 basic provisions, it is also important that when we do create the trust, we also create what is called a certification of trust and we want to have the initial trustees sign the certification of trust. This certification of trust is simply a two-page document that takes the place of say our 60-page trust document. It’s the certification of trust that we give to our banker, our broker, we give it to our insurance agent, we take it to the clerk of courts title office to change the title on our vehicle. That certification of trust is going to identify who the trust makers are, who the trustees are, and it’s going to identify the name of the trust for titling purposes. That certification of trust is a very important document to create at the same time we are creating the revocable trust. Make sure that the name of the trust includes the date on which the trust was signed, make sure that the certification of trust which calls out the name of the trust also includes the date that the trust was created.
Well, I hope you found this podcast helpful with respect to understanding what are the 10 most important provisions to put in a revocable trust. Obviously, there are other provisions that we encourage you to add, but these are the 10 must-have provisions that will guarantee that you will get some success out of your planning. Hopefully you have found this podcast to be helpful. It will provide hopefully some clarity and some confidence. I would encourage all of you to proceed with your estate planning. Do not procrastinate. Just as I have always said before, remember, the time to repair the roof is when the sun is shining. Have a great day. Thanks for being with me.
