Cummings & Lockwood Estate Planning FAQs
Administering Revocable Trusts
A Revocable Trust is a document created during an individual’s lifetime to manage his or her assets and distribute the remaining assets after the individual’s death. The “Grantor” or “Settlor” is the individual who created the Trust and the “Trustee” is the person responsible for administering the Trust. The Grantor can serve as Trustee, or may appoint another person, bank or trust company to serve as the Trustee. The trust is “revocable” since the Grantor may amend or revoke the trust during his or her lifetime.
The Trustee manages the assets of the trust by making investment decisions, maintaining brokerage and other financial accounts, loaning or borrowing funds, retaining, acquiring, or selling real or personal property, hiring attorneys, accountants, investment counsel or other agents, and in any other manner as provided under the trust agreement or state law. Generally, the Trustee does not have to keep all of the beneficiaries informed of the trust, only the Grantor (if the Grantor is not the Trustee or co-Trustee).
To fund the Revocable Trust, assets must be formally transferred to the trust. Failure to formally transfer the assets into the Revocable Trust could result in the assets being subject to probate. To accomplish this, the Grantor must transfer the assets to the legal name of the Revocable Trust, which is generally referred to as follows:
“John. M. Smith, Trustee of the John M. Smith Revocable Trust dated November 1, 2016”
The exact method of the transfer will vary depending on the nature of the assets. Accounts with financial institutions will require new documents to be signed by the Grantor and the Trustee to open a new account or re-title an account in the name of the Revocable Trust. Transfers of real estate will require the preparation of a new deed, which will need to be recorded, but, it is important to consider the impact such a transfer may have on homeowners’ insurance, title insurance, and any mortgage on the property. Ownership interests in closely held business interests must be formally assigned to the Revocable Trust, taking care to follow the requirements found within an operating agreement or similar document.
During the Grantor’s lifetime, the Revocable Trust is not a separate taxpayer, and the Grantor must include all items of income earned by the trust and all corresponding deductions on his or her personal income tax return. When the Grantor is also a Trustee or co-Trustee of the Revocable Trust, the Grantor’s social security number serves as the taxpayer identification number of the trust. When the Grantor is not a Trustee, the Revocable Trust must apply for a separate taxpayer identification number and the trust will be required to file a separate income tax return (unless there is no income for that tax year), although the Grantor is still responsible for the payment of income taxes during his or her lifetime.
Upon the death of the Grantor, the trust becomes irrevocable. If the Grantor was the Trustee, the person appointed to be the successor Trustee must formally accept the position. The Trustee will generally work closely with the Executor or Personal Representative of the Grantor’s estate during the estate administration process. The Trustee is responsible for paying claims and taxes of the Grantor’s estate, and then distributing the assets to the beneficiaries as described in the trust agreement. The Trustee will generally have a duty to inform and disclose certain information regarding the trust to all of the qualified beneficiaries, except as otherwise provided for in the trust agreement or state law.