Legal Service Developer Program
The Uses and Abuses
of Revocable Trusts in Montana:
When They Are Needed and When They Are Not
E. Edwin Eck
University of Montana
School of Law
I. INTRODUCTION
A revocable trust is one where the trustor (settlor) has a right to revoke. In most states, this right to revoke must be retained by the trustor in the trust instrument. However, in Montana unless a trust is expressly made irrevocable by the trust instrument, the trust is revocable. Of course, from a drafting standpoint, it is preferable to include an express provision indicating the trustor's ability to revoke the trust.
Revocable trusts are often characterized as either "funded" or "unfunded". The primary purpose of the funded trust is to avoid probate of those assets which were placed in the trust prior to the trustor's death. The "unfunded" trust does not contain assets prior to the estate owner's death. Rather, the unfunded trust is to receive assets upon the death of the estate owner. Thus, the unfunded trust does not avoid probate.
The focus of this presentation is the funded revocable trust.
II. USES OF REVOCABLE TRUSTS
There are a variety of uses of such trusts.
A. Asset Management (during lifetime). An estate owner may wish to have someone else manage assets for him or her during lifetime, but does not want to give up control. A number of circumstances could be cited where management by someone else is desirable. I will list three such circumstances:
1. Client A may have recently received a windfall but be inexperienced in asset management.
2. Client B may be intending to travel substantially. Client B wants someone else to handle the continuing monitoring of investments as well as the mechanics of transferring dividends and interest to a checking account.
3. Client C is an elderly person and no longer enjoys investment decision making.
In all of these circumstances, a revocable trust could be considered. In all of these cases, someone other than the trustor will be named trustee. While the trustee selection is beyond the scope of this outline, the client in need of asset management often considers the corporate trustee because of its investment experience.
This use of a revocable trust involving the selection of a corporate trustee is not one of the uses typically cited by promoters of revocable trusts. They focus on the "self-trusteed" trust, where the trustor is also the trustee.
B. Future Incapacity (during lifetime). An estate owner may fear a possible future incapacity. Without a revocable trust, if a Montanan became incapacitated, a conservatorship proceeding could be initiated (see discussion under Guardianships & Conservatorships). Critics of the conservatorship proceedings cite the following which they perceive to be disadvantages of a conservatorship.
- court costs;
- attorney fees;
- the potential publicity associated with a hearing concerning the alleged incapacity;
- the possibility of the court imposing bond;
- the requirement to inventory assets within 90 days of appointment;
- the limitations on conservators making gifts, conveying or releasing contingent interests, entering into contracts, creating trusts, exercising options to purchase, and other restraints of conservators' powers which require prior court approval;
- the requirement of annual accounts.
With the use of a funded revocable trust, all of these disadvantages are avoided.
A revocable trust is not the sole devise used to avoid the disadvantages of a conservatorship. The estate owner can also utilize a durable power of attorney, to achieve the same goal.
C. Privacy in the disposition of assets (Probate Avoidance). A will is filed as part of the probate proceeding. A revocable trust is not part of the public record. Thus, clients who wish to dispose of their assets privately are likely to find the revocable trust to be the preferred vehicle.
Examples of clients who wish private disposition include:
- a parent who wishes to disinherit a child;
- a parent who wishes to impose further trust restrictions on an adult child who is incapable of managing assets;
- a man who is acknowledging the existence of an illegitimate child;
- and a man or woman whose estate plan is beyond the mores of the community.
D. Privacy in the nature and value of assets (Probate Avoidance). The probate statutes of many states require the personal representative to file in court an inventory of the property owned by the decedent and to list fair market values as of the date of the decedent's death. Some clients do not wish the nature and extent of their assets to be part of the public record.
However, privacy in the nature and value of assets is not a valid reason to establish a revocable trust in Montana. MCA § 72-3-607(3), reads:
The personal representative shall send a copy of the inventory to interested persons, or file the original of the inventory with the court and send a copy of the inventory to interested persons who request it.
Thus, a personal representative in Montana is not required to file an inventory with the court.
E. Avoiding the fees and costs associated with probate (Probate Avoidance).
1. Effective July 1, 1992, the filing fee for the commencement of a probate is $70. MCA § 25-1-201(m).
2. The personal representative is required to publish a notice to creditors. MCA § 72-3-801. Publication fees vary from newspaper to newspaper.
3. Personal representatives are entitled to reasonable compensation. Under Montana law, that compensation shall not exceed 3% of the estate for the first $40,000 of assets and 2% of the value of the estate in excess of $40,000 without court approval. MCA § 72-3-631.
4. The compensation of the attorney shall not exceed 1 1/2 times the compensation allowable to the personal representative. MCA § 72-3-633. An interested person may file a motion for a court determination of the "reasonableness" of the compensation of any person employed by the personal representative, including any attorney. MCA § 72-3-634.
The Montana Supreme Court has concluded that these statutes require that the fee charged for legal services be reasonable. Such is ascertained by considering the time spent, the nature of the service, and the skill and experience required. ESTATE OF ROBERT E.. STONE, 768 P.2d 334, 336 (Mont. 1989). In the same case the court expressly rejected the argument that the percentages set forth in MCA §§ 72-3-631 and 72-3-633 are standard fees.
Because of the lack of published and reliable data concerning all of these fees, it is simply difficult, if not impossible, to make any certain comparisons. Further, it is likely that fees vary substantially from lawyer to lawyer. Also, the same lawyer might charge different amounts to different clients for performing similar services depending upon the responsibility assumed, the matter's complexity, and the time devoted to the project. These variances in fees and the lack of data concerning fees opens the door for irresponsible advocates of revocable trusts and the advocates for probate to overstate their positions.
Avoiding the delays associated with probate (Probate Avoidance) The public perceives that there are a number of delays associated with probate. In fact, the Montana Uniform Probate Code does set certain time periods which must elapse before the estate can be closed. A creditor has four months after the date of the first publication of notice to creditors within which to file a claim. An estate cannot be closed by a sworn statement until the expiration of six months after the date of the original appointment of the personal representative. No corresponding restrictions are applicable to a revocable trust.
If the value of the gross estate exceeds the applicable exclusion amount, a federal estate tax return must be filed within 9 months after the decedent's death. IRC §§ 6018 and 6075. If either a probate estate or a trust estate contains assets which are difficult to value or assets which raise other estate tax issues, it is not unreasonable to assume that the fiduciary will need the full nine months to collect the data necessary to complete the return. Further, the Internal Revenue Service has three years after the return was filed, to audit and assess additional tax. IRC § 6501. This three year period applies both to a probate estate and to a trust estate.
In summary, while a probate estate does require that certain time periods elapse prior to closure, both the probate estate and the trust estate face the same tax considerations which could mean the continuation of the estate.
G. Avoiding probate generally. As noted, one primary use of the revocable trust is simply to avoid probate generally. Without identifying any specific perceived undesirable characteristic of probate, such as a lack of privacy or excessive cost, some of the public simply believe that probate is bad.
III. PROMOTERS OF REVOCABLE TRUST
Unfortunately, there is a variety of unscrupulous promoters of revocable trusts who make misstatements and misleading statements concerning their uses. The following is a listing of such statements and one teacher's response.
A. A revocable trust can save taxes which cannot be saved though a will and probate.
FALSE To a considerable extent a revocable trust is disregarded for all tax purposes. For gift tax purposes, the transfer of assets to a revocable trust is not a taxable gift because of the trustor's power to revoke renders that transfer incomplete. For income tax purposes, the income, deductions, and credits of the trust are attributed to the trustor. IRC §§ 676 and 671. For estate tax purposes, all of the trust's assets are included in the trustor's gross estate. IRC § 2038.
A common estate tax planning technique is the use of a "bypass B”, or "credit shelter" trust. Assets placed in such a trust are not subject to estate taxation upon the death of the surviving spouse. Often the maximum amount of assets which can be sheltered against the estate tax unified credit of IRC § 2010 are placed in such a trust.
These trust provisions can be part of a will (a testamentary trust) funded upon the death of the estate owner. The same trust provisions can be made part of a revocable trust. The same estate tax savings can be achieved either instrument.
B. A will is subject to possible contests. A revocable trust is not subject to contest, or is subject to contest to a lesser degree.
ESSENTIALLY FALSE Montana has cases which indicate that gratuitous transfers by trust are subject to attack on the basis of a lack of capacity, undue influence, and fraud. See e.g ADAMS v. ALLEN, 679 P.2D 1232 (Mont. 1984). These same grounds can be used to attack a transfer by will.
Perhaps one could argue that the Montana Uniform Probate Code's notice requirements might encourage a contest. For example, MCA § 72-3-603 requires a personal representative to give notice of his appointment to the decedent's heirs and devises within 30 days of the personal representative's appointment. No similar requirement exists for revocable trusts upon the death of the trustor. However, I think that if there is evidence of a lack of capacity, undue influence, or fraud, a substantial gratuitous transfer will be attacked whether the transfer is made by trust or will.
C. Assets placed in a revocable trust are not subject to creditor attack.
FALSE During the trustor's lifetime, property in a revocable trust is subject to the claims of the trustor's creditors. MCA § 72-36-301. After the trustor's death, trust property is subject to the claims of the creditors of the decedent trustor's estate. MCA § 72-36-302.
D. Assets placed in a revocable trust are not subject to a spouse's claim for an elective share.
FALSE Assets placed in a revocable trust are included
in the trustor's augmented estate and subject to the spouse's right
of election.
MCA §§ 72-2-222(l)(b) and 72-2-221.
E. Assets placed in a revocable trust are not counted for Medicaid purposes.
FALSE The income and principal of a trust is treated as an available resource of the trustor for Medicaid purposes if the trust was established by the trustor during the trustor's lifetime. 42 USC § 1396p (d).
F. One may transfer assets at death in trust wherein a second person is a discretionary beneficiary. The second person does not have to count those assets for Medicaid purposes.
ESSENTIALLY TRUE If such a trust is a testamentary trust (i.e., if the trust was created by will), the assets of such a trust are expressly excluded by statute. 42 USC § 1396p (d). There is no similar express statutory exclusion if the discretionary trust provisions are part of a revocable trust. Policy considerations could argue that there should be no distinction between either trust since the discretionary beneficiary cannot force a distribution to him/herself in any event. Nevertheless, a cautious practitioner might prefer a discretionary trust created by will over one created by a revocable trust in such a circumstance.
G. A probate proceeding necessarily Includes many court hearings.
FALSE An estate can be probated informally under the Montana Uniform Probate Code. While documents have to be filed with the Clerk of Court, NO HEARINGS ARE REQUIRED. MCA § 72-3-201 et seq.
H. Everyone needs a revocable trust.
FALSE In Montana there are some good reasons to consider a revocable living trust. Perhaps a client desires asset management by another person or a trust company. Perhaps a client desires privacy in the disposition of his assets. Or perhaps, a client owns real property in another state where probate proceedings are more cumbersome or clearly costly.
While there are good reasons for some to consider revocable trusts, there is no good reason for everyone to adopt a revocable trust. Potential disadvantages must be considered.
First, typically, revocable trusts are more expensive than wills to create. Trust instruments are usually more complex than wills. Also, time has to be devoted to assets transfers.
Second, simplicity favors retaining assets in the name of the estate owner. During the estate owner's lifetime there is no trust instrument which must be provided to a stockbroker, a title company, or other third party.
One alternative for a married couple who wants to avoid probate is to place assets in joint tenancy with rights of survivorship and adopt durable powers of attorney.
IV. THE TRANSFER AND HOLDING OF ASSETS IN REVOCABLETRUSTS:CONSIDERATIONS PRIOR TO THE TRUSTOR'S DEATH
A. Title to assets should be transferred to "[name of trustee], trustee under Trust Agreement dated [date of execution] between [name of trustee] and [name of trustor]." Some trust drafters also provide a name for the trust in the trust instrument and include that name in the title of transferred assets.
- If a partnership interest is to be transferred, any written partnership agreement should be examined. Express procedures for making the trustee an assignee of the partnership interest should be followed. Written consent of the other partners may be necessary. If a limited partnership interest is being transferred, it will also be necessary to amend the certificate of limited partnership.
C. If real property is to be transferred, the trustor's title insurance policy should be examined to see if the title company's guarantee will be sufficient after the transfer.
If the property is subject to an encumbrance, the deed of trust or the mortgage should be examined to see if it includes a "due on transfer" clause. Some practitioners as a matter of course obtain express written permission from the lender before making a transfer of encumbered property to a revocable trust.
D. If an asset does not have title, a written assignment should be prepared.
Some practitioners who routinely include clauses in wills authorizing the use of a separate writing to dispose of tangible personal property as provided in MCA § 72-2-533, include similar clauses in both the pour over will and in the revocable trust. Thus, even if such an asset was not effectively transferred in trust prior to the trustor's death, the dispositive provisions of both the will and the trust are identical.
E. Stock in an S corporation can be held in a revocable trust. IRC § 1361 (c)(2)(A)(i) provides that when the grantor is treated for general income tax purposes as the owner of a trust, as is the case with a revocable trust, such a trust may own stock in an S corporation without jeopardizing the S election.
F. The transfer of an installment obligation to a revocable trust is not a disposition of the obligation which would result in a realization of the untaxed profit at the time of transfer. Rev. Rule. 76613. 1974 2 C. 3. 153.
Some uncertainty can arise if the installment obligation is owned by husband and wife and a transfer is intended to a trust which is revocable by only one spouse. One alternative is to make the transfer in two distinct steps. First, one spouse could simply make an outright transfer of his interest in the obligation to the other spouse. This transfer should not result in the recognition of gain. IRC §§ 453B(g)(1) and 1041. Second, the transferee spouse could make a subsequent transfer to her revocable trust.
G. The transfer of Series EE U.S. savings bonds to a revocable trust does not cause the acceleration of recognition of bond interest. Rev. Rul. 58-2, 1958-1 C.B. 236. PLR 9009053.
H. The capital gains exclusion on the sale of a principal residence is not affected if title to the house is held in trust. IRC § 121 provides a capital gains exclusion of up to $125,000 to a person over the age of 55 who sells his principal residence. This exclusion is obtainable even when the title to the home is held in a revocable trust. PLR 8007050.
I. "Flower" bonds may be held by a revocable trust. Certain outstanding U.S. government bonds are eligible for redemption at par for the payment of the federal estate tax. When such bonds are held in a revocable trust, either (1) the trust instrument must require the trustee to pay all or a pro rata portion of the estate tax or (2) statutes in the decedent's domicile must require the trustee to pay the tax or the proportionate share of the tax that is attributable to the trust assets. While MCA § 72-16-603 is such an apportionment statute, it is preferable that the trust instrument require the trustee to pay such taxes. Any tax apportionment provisions of a pour over will should be consistent with the trust instrument.
J. The trust instrument and a durable power of attorney should be drafted so that the trustee could make similar distributions to an agent who in turn could make gifts to third parties.
K. Generally trusts must have their own identification numbers and file their own income tax returns, unless they have under $600 in gross income. IRC § 6012(a)(4). Most grantor trusts are subject to these same requirements, although all of the items of income, deduction, and credit are included in the computation of the trustor's personal income tax liability. Regs. §§ 1.6019-3(a)(1), 3(a)(9).
However, if the trustor or the trustor's spouse is a trustee or a co-trustee of a revocable trust, such a trust does not need its own identification number and no trust income tax return need be filed. Regs. §§ 1.671-4 and 301.6109-1(a)(2).
V. THE REVOCABLE TRUST AFTER THE TRUSTOR'S DEATH
A. Transfer of assets. The trust instrument may provide for trust termination upon the death of the trustor. If the trustor is also the trustee, a successor trustee would serve. Typically that successor is designated in the trust instrument. However, if no practical method of appointment is included in the trust instrument, a co-trustee or a beneficiary may petition to court to fill the vacancy. The court is to give consideration to the wishes of trust beneficiaries who are 14 years of age or older. MCA § 72-33-621.
The successor trustee will need to present proof to third parties with whom the trustee must deal that he or she is properly acting as trustee. If the successor trustee is court appointed, a copy of the trustor's death certificate and a certified copy of the court order should suffice.
If the successor trustee is not court appointed, the procedure is less certain and will likely vary from third party to third party. Perhaps a copy of the trustor's death certificate and a verified copy of the trust instrument will satisfy the requirements of most third parties. If a third party requires that the copy of the trust instrument be certified by a public official (clerk and recorder or clerk of court), the revocable trust's advantage of privacy in disposition of assets would be lost.
In the case of Montana real property, the identity of any successor trustee may be established by a recorded affidavit of the successor trustee specifying: (1) his name, (2) his address, (3) the date of his succession, (4) the circumstances of his succession, and (5) confirming that he is currently lawfully serving as trustee. MCA § 72-36-206(6).
B. S Corporation stock. After the
trustor's death, the trust becomes irrevocable. The irrevocable
trust may continue to hold S stock for two years after the trustor's
death. IRC § 136(c)(2) (A)(ii). Unless the continuing
trust provisions satisfy the requirements of a “qualified
Subchapter S trust” as specified in IRC § 1361 (d)(3),
the corporation will lose its S status.
