Trusts 101 for physicians part 4: Estate planning

In part one of our look at trust basics for doctors we covered the basic working vocabulary of trusts you must understand when considering trust strategies and their effectiveness and legality. In part two we examined the basic rules on the taxation of trusts as provided by the I.R.S. In part three, we outlined some red flags and specific tax evasion schemes involving the use of abusive trusts that are heavily marketed to physician at this time of year. This week, we begin an examination of specific trusts and their uses, starting with the most common and widely applicable estate planning trust for doctors, the Revocable Living Trust (RLT), also commonly referred to as a ‘family trust’ or a ‘living trust’.

Revocable Living Trust (RLT) Basics

What is an RLT?

The RLT is a revocable trust created as the core foundation of many estate plans. It is a flexible and well proven tool that can be easily modified to accommodate a wide variety of detail, family structures, assets and life circumstances. This trust is created by you as the Grantor during your life, is funded with specific assets, and usually species that the Grantor(s) are the Trustees and names who the Beneficiaries are.

Why is it Revocable?

The RLT is revocable so that it is not a completed gift for tax purposes during your lifetime and so that you can infinitely modify it, including who the beneficiaries and trustees are, what assets it controls, who gets them and when. This flexibility is key and allows you to make these changes as required by your life circumstances and relationships until you take your last breath when it becomes irrevocable as last drafted or amended by you. This means you can add and remove the people involved and the details and never worry about being “stuck” with any decision you make now.

What are the benefits of an RLT vs. a Will?

• In my opinion, an RLT addresses much of the work that using a Will alone leaves to others, often surviving family members during an already stressful time, with a greater degree of control, certainty and precision.
• Assets placed in an RLT are trust property and under the control of the named Trustee, without any other legal process being required.
• Unlike with a Will, assets in an RLT pass privately, outside the public probate process. This means the details of what you leave and to whom, through the trust, are private. This avoids the expense and delay of probate and gets beneficiaries and trustees control and use of the assets faster, important if they need the financial support.
• Although referred to as if it is one thing, a professionally drafted RLT is usually a combination of multiple estate planning documents and includes the trust, a will, a pour over will, living will and healthcare and legal powers of attorney, among others, collectively referred to as ancillary documents.
• Collectively these documents can help avoid what are usually months of delay and thousands of dollars in legal expenses that are required when a guardianship or conservatorship is required if you can’t make your own legal and/or financial decisions and if various third parties like banks, government agencies and other financial institutions don’t accept a legally executed power of attorney as they should, but are not always required to accept.

Does it provide Asset Protection?

Yes, and no. For you as the Grantor, because it is revocable, it provides no protection, for your assets, from your liabilities, during your lifetime. This is among the most common asset protection mistakes doctors make, assuming that their home, savings and other assets are protected because they are in their RLT.

For the beneficiaries, it can provide significant asset protection, if properly drafted to do so, from their special needs, current or future spouses, bankruptcies and other potential liabilities. It can be drafted to allow a trustee to make ‘discretionary” distributions or to limit distributions to specific amounts, trust income only or for a specific set of events (education, marriage, home purchase, age, etc.). They can even be drafted to make income matching distributions to motivate beneficiaries to be independently successful and help avoid them remaining fully dependent on the trust, aka, ‘trust fund babies’.

Next, we examine life insurance trusts.