Revocable Living Trusts

Settlors, Co Trustees and Successor Trustees

These days, the use of Revocable Living Trusts (RLTs) is becoming increasingly prevalent in estate planning.  The flexibility and financial advantages associated with non- probate transfer of assets , makes the RLT  an attractive alternative to the more traditional estate planning tools such as Wills and codicils.

With the RLT,   an individual (called the "Settlor") singly, or together with their spouses,   transfers assets   into a trust,  which  allows them  to manage their  to make decisions before death. Those assets remaining within the trust at the time of death, are then distributed according to the wishes of the Settlors.  Where Wills do not become effective until the death of the testator, (the person making the Will), and  require probate- which means  the estate must  pass through the  court system, the RLT allows the Settlor to use resources within the Trust on their Health, travel  and life needs. When the Settlor becomes incapacitated, either their Co-Trustee ( typically a Spouse), or the Successor Trustee will carry out their wishes according to their instructions of the Trust.

Co-Trustee Vs. Successor Trustee

Trusts, of any kind, are administered and managed by Trustees.  In the case of an RLT, the settlor (the person establishing the Trust) acts as their own trustee.  Where spouses are seeking to establish RLTs, they act as "co-trustees" for their benefit and for the benefit of each other.   This means  each Trustee owes a separate fiduciary obligation to the other, which  allows them to manage, disburse, and liquidate assets in the estate prior to distribution, when and if certain events occur.  For instance, if one spouse becomes incapacitated (such as Alzheimer’s or a stroke) the other "co-trustee" is then invested with complete authority to disburse assets consistent with the Trust.

In addition to providing for "Successor Trustees " who will assume responsibility for the trust  in the event of death or incapacity, a  Settlor may retain the ability to appoint a Co-trustee.  The important distinction here  is that , where a successor trustee is authorized solely  to carry out the directions under the terms of the Trust, a Co-trustee, once appointed, can change  the terms of the Trust in its totality. This is especially critical where the original Settlor is suffering from dementia, and has appointed a child or sibling as a Co- Trustee.  The Co-trustee can then , under certain circumstances, amend the terms of a revocable trust, and completely alter the distribution provisions to benefit themselves or others.

LIABILITY OF CO-TRUSTEE

For instance, take a scenario where Mom has three adult children. Mom has placed her assets into an RLT naming all three children as equal beneficiaries under the terms of the Trust.   Confused, agitated and in the in stages of dementia, Mom perceives two of her children have "abandoned" her and are "ungrateful" for what they have.  Her eldest child, who lives nearby, attends to her and deals with her caregivers, lawyers and doctors.   Seemingly lucid, mom executes an amendment to her RLT naming the oldest of the three children as her "Co-Trustee".  With this new authority, the new co-trustee then waits until Mom’s dementia is fully evident, and then alters  the Trust to remove his two siblings as distributees, and makes himself the sole distributee.

This scenario sounds scary. Unfortunately , it is all too common.

Not only are there questions of undue influence and lack of capacity here, but most important, when named as a "co-trustee" the eldest sibling assumed fiduciary responsibilities to the remaining siblings, who remained as beneficiaries to the RLT.

Fiduciary Duties.

As a Co-Trustee, certain "duties" or obligations exist which require a trustee to fully disclose, as well as a duty of loyalty and a duty of fair dealing.  In practical terms this means that a new appointed co-trustee cannot act to benefit their own interests, while acting against the interests of the beneficiaries.  If the co-trustee is going to act in his own interest, he is obligated to notify the beneficiaries of the fact he is doing so.  Failing to provide adequate notice or to act against the interests of the beneficiaries, constitutes a breach of fiduciary duty, which will subject the co-trustee to liability for damages. Any actions taken will be voided by the court.

An Ounce of Prevention.

In undertaking your estate planning, consult with an attorney regarding the appropriate steps which should be taken to properly ensure compliance with your intentions. Seek advice on how to safeguard your estate and loved ones from manipulation and fraud, which ensuring your plans for retirement, long term care, disability and succession are carefully crafted. Estate Planning, especially with seniors who may have medical and memory issues is an extremely sensitive matter. Don’t go it alone.