I often have clients ask me if they should have a revocable living trust as part of their estate plan. A trust is a fiduciary relationship through which one person or entity, such as a bank, holds assets for another person. A fiduciary is a person who owes a high duty of care to another person.
At its most basic, a trust is simply one person, commonly known as the Trustee, holding assets for another person, commonly known as the beneficiary.
The person who establishes the trust may or may not also be the trustee and the beneficiary. The person who establishes the trust is commonly known as the grantor or settlor. The grantor sets the terms of the trust and put his assets into the trust.
What makes trusts complicated and scary to people is the trust agreement. The trust agreement specifies the terms through which the trustee holds the assets of the trust for the beneficiary. A trust agreement is essentially a contract between the grantor (the person who created the trust), the trustee (the person who holds the assets of the trust), and the beneficiary (the person who benefits from the trust).
The grantor, trustee, and primary beneficiary of a trust could be the same person. So, for instance, Mr. Smith could create a trust for his benefit, with his money, naming himself to act as trustee of the trust. In fact, this scenario often occurs with revocable living trusts.
A revocable living trust is a trust that a person creates during their lifetime. This is why the trust is called a “living trust.” The opposite of a living trust would be a “testamentary trust.” A testamentary trust is a trust that is created in the last will and testament of an individual.
A testamentary trust is created when additional wording is placed in the Will of a decedent creating the trust. Because a Will is an ineffective document until the individual making the Will dies, a testamentary trust is ineffective until such time as the maker of the Will dies.
A living trust, on the other hand, can be effective during the maker’s lifetime. I frequently recommend that a client have a living trust when he owns real estate in another state.
If you die owning real estate in more than one state, then your Will would have to be submitted to probate in the state in which you died domiciled and in the state, or states, in which you own real property. For instance, if Mr. Smith dies a resident of New Jersey but he also owns a condominium in Florida, then his Will has to be submitted to probate in New Jersey, the state of his primary residence, and Florida, a state in which he owned real property.
Submitting a Will to probate in New Jersey is quite simple. In fact, it would probably take more time to explain what “probate” is and the purpose of submitting a Will to probate than it would to actually perform the act of submitting a Will to probate, if I disregarded the amount of time it takes you to drive to your local surrogate’s office.
But submitting a Will in another state, such as Florida, can be difficult. In some states, the act of submitting a Will to probate is complicated. And, even if the other state has a simple process, as does New Jersey, the fact that a person has to submit a Will to probate in two or more states can cause angst and confusion.
For this reason, if a client tells me that he owns real property in a state other than New Jersey, I typically recommend that the client have a revocable living trust. Used in this context, a revocable living trust is really just a Will-substitute.
In other words, the living trust acts like the person’s last will and testament. The only difference is, unlike a Will, the living trust has effectiveness during the client’s lifetime, so I can have his out-of-state property titled into the living trust and avoid the need to submit his Will to probate in the other state after he dies.
Because the terms of the living trust control who gets his out-of-state property after his death, not his Will, I do not have to submit his Will to probate in the other state. Since a living trust is acting like a Will, the trust should be signed in a manner similar to a Will. The signature of the grantor should be witnessed by two people and all the signatures should be made in the presence of a notary.