Do You Need To Fully Fund Your Revocable Living Trust During Your Life? Separating Facts From Fiction

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1 Do You Need To Fully Fund Your Revocable Living Trust During Your Life? Separating Facts From Fiction By Richard M. Morgan & Loraine M. DiSalvo This newsletter is the second part of a three part series on Revocable Living Trusts (RLTs). The first newsletter on this topic, which appeared in June 2015, was entitled, Should I Use a Will or a Revocable Living Trust? Separating Facts From Fiction. The first newsletter was designed to help explain how to decide whether a Will or a Revocable Living Trust should be the primary estate planning document. This newsletter explores the next issue that arises for those who choose to use an RLT- based estate plan - when and to what extent do they need to transfer their assets to the RLT while they are still living. The process of transferring assets to an RLT is often referred to as funding the RLT. Funding an RLT is accomplished by changing the ownership of assets so that they are owned by the Trustee of the RLT, instead of by the individual creator of the RLT. Fully funding an RLT means that all, or nearly all, of the assets that can be transferred to the RLT have been transferred to it. Please note: some assets, such as IRAs, 401(k) accounts, and other tax- deferred retirement accounts, should continue to be owned by the individual, and should not be transferred to the RLT during the owner s lifetime. However, most other assets, such as regular bank or brokerage accounts, stocks, bonds, real estate, and interests in closely- held companies can be owned by an RLT. Many people have been told or heard that an RLT must be fully funded as soon as possible after it has been created in order for it to be of any use. In some states, such as Florida, where the probate process can be difficult and expensive, it may be true that fully funding the RLT is desirable for most or all situations. However, at least for Georgia residents, there is no universal answer as to when and how fully an RLT must be funded. The actual decisions regarding when and how fully to fund an RLT should instead be made on a case- by- case basis, based on each individual s situation and the reasons he or she decided to use an RLT- based estate plan. The benefits that the RLT are intended to provide will drive the decision of when and how fully the RLT should be funded. In this newsletter, we will discuss the level of funding needed to ensure that an RLT- based plan provides a given benefit. The possible benefits of an RLT- based plan were discussed in our June 2015 newsletter. Please note: it is possible for more than one benefit to be important to any given client. Where multiple benefits are desired, the best approach is generally to use the highest level of funding appropriate for the desired benefits. However, where the desired benefits do not require funding the RLT prior to death, those clients have the option to either fund anyhow, or just to skip the extra steps and hassles that funding can create for them during their lifetimes.

2 1. You chose an RLT- based plan primarily because you are concerned that you may become incapacitated on a long- term basis in the future, or that you may simply want or need assistance in managing your assets on a long- term basis. RLTs are often the best choice where long- term asset management by a third party will be needed, because a successor Trustee is the legal owner of the RLT s assets, while someone acting under a Power of Attorney is not the owner of those assets. Agents acting under Powers of Attorney often encounter resistance from third parties, especially banks and brokerage houses, whereas Trustees generally do not encounter these issues. Funding Needed and Timing: If you chose an RLT simply because you wanted to help ensure that someone could take over management of your assets for a long period during your lifetime, and you do not have any other factors behind your selection of an RLT, then you do not need to fund the RLT at all unless and until your incapacity becomes a reality. If and when you ever become incapacitated (or feel that you are on the verge of becoming incapacitated), you can fund the RLT if you are still able to act for yourself. If you have already become incapacitated, then your attorney- in- fact (the agent) under your financial Power of Attorney can fully fund the RLT. An RLT used in this way is often referred to as a stand- by RLT, because it stands by empty unless and until needed. If you don t end up funding the RLT during your lifetime because incapacity does not become an issue, then the RLT will simply take effect at your death, along with your Will. 2. You chose an RLT- based plan because you are afraid that you may begin to suffer a weakened mental or physical state in the future, and that you may need protection, either from your own destructive actions or from others who may try to take advantage of you. An RLT is the best way to voluntarily take steps to protect yourself against your own imprudent actions or from the actions of others who may try to take advantage of you. This benefit is essentially the same as the first benefit discussed above, but highlights a different concern. Unfortunately, many people who begin to decline mentally begin to engage in atypical behavior, which can often result in great financial damage and sometimes even bodily harm. Also, many unscrupulous people prey on individuals who are in weakened mental or physical states. The use of a stand- by RLT can give you a sort of safety net. If you are aware enough to realize that you are making poor decisions and resign, your successor Trustee can step in and help protect you from yourself. If you are not so aware, the successor Trustee may be able to force this protection on you. Once a successor Trustee is in place and acting on your behalf, the Trustee can take steps to ensure your safety and well- being, even if you can t do so for yourself. The Trustee can also step between you and the predatory people who may be trying to take advantage of you. Funding Needed and Timing: As with the first benefit, a stand- by RLT does not need to be funded unless and until incapacity, erratic behavior, or other signs of weakness begin to show. You can resign if you are aware enough of the problem, or your successor Trustee can step in if you ve already become incapacitated. The attorney- in- fact (the agent) under your financial Power of Attorney can fully fund the RLT. Again, if you don t end up funding the RLT during your lifetime

3 because incapacity does not become an issue, then the RLT will simply take effect at your death, along with your Will. 3. You chose an RLT primarily because you own (or intend to own) real estate located outside your principal state of residence. If you have your principal residence in one state, but own real estate in one or more other states, then you can end up having to have a probate process in the state where your principal residence is located, along with an additional probate process (an ancillary probate) in every other state where you own real estate. Having an RLT own the real estate in the other states, instead of owning it in your own name, can help avoid the need for ancillary probate processes in those states. Funding Needed and Timing: The RLT should become the owner of the real estate that is located outside of the state where you have your principal residence. This real estate should be transferred fairly quickly after you create the RLT. However, you do not need to transfer real estate located in the same state as your principal residence or any non- real estate assets to the RLT. 4. You chose an RLT- based estate plan primarily because you are concerned about the risk of post- death disputes. RLTs can significantly reduce the risk that a post- death dispute will disrupt your desired estate distribution plan, if used correctly. Therefore, if you plan to treat similar beneficiaries unequally (favoring one child over others, for example), if you have heirs who will not be beneficiaries, or if for any other reason you think it likely that someone may decide to cause trouble after your death, you may want to use an RLT- based estate plan instead of one based on a Will. Funding Needed and Timing: In order for the RLT to help suppress post- death disputes and reduce the damage in costs and delays that any such disputes may cause, you will need to fund your RLT as fully as possible, as soon as possible after you have created it. You will also need to ensure that it stays fully funded throughout your lifetime, and that beneficiary designations are well- coordinated with the RLT and will not result in assets becoming part of your probate estate. This is because the dispute suppression effects of an RLT depend largely on the RLT s ability to reduce or eliminate the need to have your Will admitted to probate after your death. If assets are owned in your name at your death, instead of by the RLT, or if assets are paid directly to your estate under a beneficiary designation, then the Will must be admitted to probate before the RLT can deal with those assets. 5. You chose an RLT- based estate plan primarily because you want to prevent your surviving spouse from disrupting your estate plan by electing to take a Year s Support (in Georgia) or a forced or elective share (in other states). Georgia provides that a surviving spouse is entitled to request an amount of assets from a deceased person s probate estate in the amount needed to provide the spouse with support for one year after the decedent s death (the year s support). Most other states provide that a surviving spouse must receive at least a certain minimum share of the decedent s assets; this is referred to as a forced share in some states and an elective share in others. An RLT can help reduce the risk that a surviving spouse will make a claim for a year s support or take

4 a forced or elective share. Please note: an RLT will not effectively protect against a forced or elective share in some states, but it will in others. Knowing your state s laws is particularly critical in this area. Funding Needed and Timing: If the goal is to protect against a year s support claim or a forced or elective share, then you will need to fully fund your RLT as soon as possible after you have created it, and ensure that it stays that way during your lifetime. 6. You chose an RLT- based estate plan primarily because you want the terms of your estate plan to stay private after your death. A Will that has been admitted to probate is a publicly- available document. Even if the Will does not have to be admitted to probate, they must often be filed with the appropriate court and may become publicly available. However, an RLT does not become part of a public record, and an RLT is generally not required to be filed with any court unless litigation arises. This helps ensure that the terms of the RLT remain private, and do not become subject to public review. This privacy remains in effect even if the Will states that assets from the estate will be distributed to the RLT: the Will generally names the RLT and provides for the distribution of assets to it, but it does not usually describe the terms of the RLT itself, and the RLT does not have to be filed just because the Will refers to it. Many people find this greater degree of privacy appealing. Funding Needed and Timing: If the RLT is being used just to help ensure that the terms of estate plan remain private, then you do not normally need to fund the RLT during your lifetime unless another factor becomes important in the future. 7. You chose an RLT- based estate plan because you live in a state where the probate process is often expensive and onerous, such as Florida, (a bad probate state). Many people choose to use RLT- based estate plans because they live in states which require difficult, expensive, and time- consuming probate processes. In these states, the RLTs are generally used to avoid the need for probate. Funding Needed and Timing: If your intent in using an RLT is to avoid the need for a probate process at your death, then you need to fund your RLT as fully as possible prior to your death, preferably as soon as possible after it has been signed. You then need to ensure that you keep it that way. 8. You chose an RLT- based estate plan primarily because you wanted to be able to make a list of specific bequests of money or other assets, and to be able to change those bequests from time to time as easily as possible, and without having to formally amend your Will. Many Wills contain a provision that allows for the creator to provide a separate list of tangible personal property items to be distributed to specific people. This allows the creator to make a list, separately from the Will, and then to change the list from time to time, without changing the Will. If the items provided are not likely to become the subject of disputes, then this kind of provision may be fine. However, it does not allow for bequests of assets other than tangible personal property, such as cash bequests. In addition, if an item is valuable, either economically or sentimentally, and more than one person

5 wants it, the list may not end up being effective since it is not legally binding. Because an RLT can incorporate a legally binding list by reference, and because an RLT can also allow the list to provide for cash bequests as well as specific tangible personal items, many people who want to be able to make and then change lists of specific bequests decide to use an RLT- based estate plan. Funding Needed and Timing: If the ability to easily make and change specific bequests is the primary reason you decided to use an RLT- based plan, then you do not need to fund the RLT during your lifetime unless another factor becomes important in the future. 9. You chose an RLT primarily because you wanted to name a corporate fiduciary as an initial or successor Trustee, and you also wanted the corporate fiduciary to serve as your initial or successor attorney- in- fact (agent) under your financial Power of Attorney. Unfortunately, many people do not have individuals who would be good choices to serve as a successor Trustee under an RLT or as the attorney- in- fact under a Power of Attorney. These people often turn to a corporate fiduciary, such as an independent trust company or a bank- or brokerage- trust department. However, most corporate fiduciaries will not agree to serve as the attorney- in- fact under a normal Power of Attorney unless they are also named as the initial or successor Trustee under an RLT. This helps better ensure that they will be able to more easily do their job of taking care of you if they ever need to step in during your lifetime. Funding Needed and Timing: If you are using an RLT that includes a corporate fiduciary and you want the corporate fiduciary to also serve as the attorney- in- fact under your Power of Attorney, then you do not need to fund the RLT before your death unless and until you become incapacitated or until another factor becomes important in the future. 10. You chose an RLT- based estate plan primarily even though you do not live in a bad probate state, because you just want to try to make sure the administration process will be as easy as possible for your family after your death. In general, we don t recommend that our Georgia- based clients fully fund their RLTs just to try to make the administration process easier for their families because Georgia is not a bad probate state. But, some clients want to do so anyhow, and those who don t mind the extra hassles during their lifetimes are certainly welcome to do so. Funding Needed and Timing: If your primary goal in using an RLT- based estate plan is to try to keep the administration process as simple and quick as possible after your death, then you will need to fully fund your RLT prior to your death, and make sure that it stays that way during your lifetime. If you have questions about whether an RLT is right for you, or whether you should be taking steps to fund your existing RLT, either fully or with certain assets, we are happy to discuss your situation and help you decide your next steps. To schedule an appointment, please contact Karrah Hammock at khammock@morgandisalvo.com or (678)