REVOCABLE TRUST IN GENERAL
The use of revocable trusts (“grantor trusts”) in Michigan is widespread. Effective April 1, 2010, revocable trusts in Michigan are administered under the MTC (Michigan Trust Code). The MTC is located at Article VII of the Estates and Protected Individuals Code (EPIC).
A trust is really nothing more than a contract that effectively transfers title to assets. The principal characteristics of a revocable trust (sometimes also referred to as aliving trust) include the following:
- The trust is created during the grantor’s lifetime and is funded with a transfer of the grantor’s property to a trustee.
- The grantor retains the right to revoke the trust and to retrieve the trust assets.
- The grantor is the sole lifetime beneficiary of the trust.
- When the grantor dies, the trust either terminates or continues, usually with the grantor’s spouse or heirs designated as trust beneficiaries.
- The grantor acts as the trustee of the trust, although others (e.g., a spouse, child, or financial institution) may act as the trustee or the co-trustee of the trust.
Therefore, by definition, the terms of a revocable trust may be freely modified by its grantor during his or her lifetime. When the grantor dies, the trust then becomes irrevocable.
THE REQUIREMENTS TO ESTABLISH A REVOCABLE TRUST
The requirements to establish a trust are detailed. Those requirements include that there must be a grantor with an intention to create a trust, a definite trust beneficiary, and a trustee. The trust is valid when the grantor clearly manifests the intent to create a trust, which is when it is signed by the grantor. Tt is strongly recommended that the trust instrument be executed by the grantor with the same formalities as a will so that the grantor’s signature is witnessed. Additionally, it is helpful if the grantor’s signature is notarized. A witnessed and notarized trust instrument can lessen the possibility that the signature, and the validity of the trust, will be challenged, especially if the competency of the grantor is called into question.
ADVANTAGES OF A REVOCABLE TRUST DURING THE GRANTOR’S LIFETIME
A. AVOIDANCE OF PROBATE
In the event of the grantor’s incapacity—whether as a result of old age, illness, accident, or other disability—a funded revocable trust can help to avoid a probate court guardianship or conservatorship proceeding along with expenses and time. Perhaps the greatest reason for the large number of revocable trusts in Michigan is to avoid probate on the grantor’s death and to minimize the resulting administrative headaches, delays, and expenses.
B. CONTINUITY AND CONTROL OVER MANAGEMENT
If the grantor becomes disabled, a grantor revocable trust ensures that the grantor’s assets will continue to be managed according to the plan that was in effect when the grantor was capable of managing his or her own financial affairs. If the grantor acted as trustee until afflicted by his or her disability, a successor trustee (a person or an entity that was selected by the grantor, not t he probate court) can promptly take over trust management responsibilities. Preferably, the successor trustee will be a person who is familiar with the grantor’s financial and personal affairs. One additional advantage is that a bond is less likely to be imposed on a trustee than on a court-appointed conservator.
C. EASY WAY TO MANAGE YOUR ASSETS
Financial institutions and trust departments are comfortable with and prefer to work with revocable trusts. They stress that revocable trusts, trusteed by a professional fiduciary, can provide well-organized, attentive, and professional management of the grantor’s assets.Under an agency arrangement, only the grantor’s assets can be managed, not necessarily by the grantor himself or herself, as in the case of a trust.
D. EASY AND CONVENIENT WAY TO CHANGE YOUR MIND
Rather than formally adopt a new codicil each time Congress or the state legislature creates a new tax law or changes an existing statute, a less formalistic trust amendment is all that is required to accommodate that change in law. Although it is recommended that any trust instrument be executed with the formalities required for a will, it is technically easier to amend a trust because no witnesses are legally required, in contrast to a codicil, which is invalid unless there are at least two subscribing witnesses. Unless the terms of a trust expressly provide that it is irrevocable, the grantor may amend or revoke a revocable trust at any time.
E. CHOICE OF LAW
The use of a grantor revocable trust also permits the grantor to choose the state law that is to govern the validity, interpretation, and administration of each trust created under his or her trust instrument, both before and after death. This flexibility is particularly important to the grantor who moves to another state but who wants the trust administered on his or her death by the same fiduciary in the same state where the revocable trust instrument was signed and under the same set of rules, to promote continuity and familiarity with the rules and regulations that govern the trust.
The avoidance of the probate process affords some privacy to the extent that the decedent’s assets pass outside of the public legal procedure known as probate. A grantor revocable trust removes from public scrutiny the details of the grantor’s assets, liabilities, and his or her dispositive plan. Consequently, the grantor revocable trust preserves privacy about the nature of the grantor’s dispositive plan and about the unique or special details of administration of the grantor revocable trust after his or her death, such as providing for a grandchild with substance abuse issues.
F. AVOIDING HIGH COST OF PROBATE PROCEEDINGS
For larger estates, eliminating probate for part or all of a decedent’s assets may result in reduced legal fees. Avoiding probate may mean less time incurred to satisfy the requirements of the probate court and fewer court hearings, with a concomitant reduction in the estate’s legal fees. For smaller estates or estates where most of the grantor’s valuable assets have been transferred to a grantor revocable trust during the grantor’s lifetime, the same cost-savings advantage can probably be gained from an election for unsupervised estate administration.
G. FAST DISTRIBUTION OF ASSETS
Without probate court formalities, there can be a more expeditious administration of the decedent’s affairs, particularly if substantial real estate holdings, a proprietorship business, or a closely held business comprises part of the revocable trust corpus. No court involvement or approval is necessary. Consequently, efficient estate administration of the revocable trust’s assets is not dependent on the probate judge’s trial docket or court calendar in supervised estate proceedings. Moreover, any sales, transfers, or distributions that are required by the grantor revocable trust can be expeditiously completed without external and public approval hurdles attendant to court proceedings. Admittedly, however, many of these same benefits afforded by the revocable trust can also be achieved by an election to utilize unsupervised estate administration