Photo of Dennis L. Nerland, QCBy Dennis L. Nerland, QCAugust 02 2017
Tax Law

Revocable Inter Vivos Trusts

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What are the principal differences between a living (inter vivos) trust and a testamentary trust created by death? A living trust is just what the term implies, a trust created while the settlor is alive. Also known in lawyer Latin as an inter vivos trust (“between the living”), such trusts come in two basic forms – revocable and irrevocable. Because the form you choose has a significant impact on trust operation and asset protection, it’s imperative you understand the consequences of each choice before opting for one over the other.

One big advantage of an inter vivos trust is that its assets completely avoid the probate court procedures, and it can be used much like a will to direct assets to named beneficiaries. Financial privacy is maintained, unlike a will where the total value of the estate and a list of assets subject to probate are made public. With an inter vivos trust, when the settlor dies, it’s the trustee and not the surrogate court who directs the manner and means of final disposition of trust assets, since the deceased settlor decided at the time the trust was created how his or her wealth would eventually be distributed.

The inter vivos trust deed can direct the trustee to distribute the assets according to your wishes upon your death. The beneficiaries can be heirs, relatives, friends, charities, or a named group such as “my grandchildren.” The trustee can also be ordered to hold and invest assets, generating an income over a set period – for instance, until the beneficiary reaches the age of 21. Depending on the structure, the trust can also avoid “death taxes,” which would otherwise be imposed.

The actual operation of an inter vivos trust begins immediately when you, as settlor, sign the trust deed and transfer the assets to the trust. Compare this to the delayed creation of a testamentary trust, which doesn’t come into existence until you die.

When an inter vivos trust is created as revocable, it is just that. It can be ended by the settlor who created it. The settlor specifically retains this powerful right. This gives the settlor a big advantage in managing wealth. He or she can voluntarily transfer title to assets, but still retain actual control of the assets by attaching strings to them. This is because, under a revocable inter vivos trust, a settlor retains lifetime power to change the terms of the trust declaration, withdraw assets, or even end the trust by formal revocation, whenever he or she chooses. In effect, the settlor reserves the right to reclaim trust assets, “parking” those assets in the trust during his or her lifetime.

Real benefits flow from a revocable inter vivos trust. The most obvious is your ability to manage assets during your lifetime, while retaining the ongoing option to end the trust should changed economic or other circumstances dictate. After you die, there are many benefits for your spouse or heirs as trust beneficiaries. Under the terms of the trust declaration, the trust is administered by the remaining or successor trustees for the benefit of the beneficiaries. This allows for an immediate and uninterrupted income from investment and management of trust assets.

A major advantage of a revocable trust is that the trust property isn’t included in your personal estate at death, which avoids the expense and delay that surrounds judicial probate. Along with this, there’s no interruption of an ongoing family business placed in trust, public scrutiny of private financial matters is avoided, there’s no temporary gap in a beneficiary income that might be caused by the probate period, and you can choose the most advantageous law to govern the trust.

There are two main disadvantages of a revocable inter vivos trust. The first is a lack of solid asset protection ability while the settlor is alive. This is due to the fact that the settlor retains effective control over the assets. The second involves possible negative tax consequences upon the trust’s setup. However, in many cases these can be overcome with careful planning.

Invitation for Discussion:

If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Tax group at Shea Nerland LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

 

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