By, Sun Shen, Elder & Disability Law Clinic Student, Spring 2022
A revocable trust, also known as an “inter vivo trust” or “revocable living trust,” is a trust created during a person’s lifetime that holds his or her assets.[1] In the event of illness, disability, or incapacity, a revocable trust can be an effective estate planning tool for the elderly. It allows a family member or trusted friend to manage the assets of an elder person who is no longer willing or able to handle financial matters. By creating a revocable trust, the person who sets up the trust (the settlor) forms an agreement with an individual or entity (the trustee). The settlor also names the beneficiaries of the trust. The trust agreement determines how to manage and distribute the assets.[2] Revocable trusts, however, can be a double-edged sword. While they are often a useful estate planning device, revocable trusts have certain downsides and can be costly.
Much of the appeal of a revocable trust for some individuals is that it avoids probate for the assets that it holds. [3] In other words, assets in a trust can transfer to anyone that the settlor has provided for in the trust’s formation document without having a court intervene and oversee the probate process.[4] After the settlor’s death, the beneficiaries can typically access the funds quickly, while assets in probate are not accessible until a probate estate has been officially opened.[5] The probate administration process commonly takes months to a year or longer depending on the type and amount of assets, as well as any issues surrounding the debt of the estate.[6] Furthermore, wills involved in probate are public record, whereas revocable trusts and the trust documents are private.[7] With a revocable trust, the settlors have the autonomy and control over how to distribute or spend the funds.
Although revocable trusts can be a useful estate planning tool for the elderly, there are also many disadvantages associated with these trusts. One main downside is the potential high costs of administration. An institutional trustee can charge a percentage of the asset value of the trust. Other costs may include legal fees and accounting fees. Therefore, it is generally more expensive to fund a revocable trust than to simply write a will.[8] Also, revocable trusts do not replace the need for a will. Seniors may forget to transfer certain assets to the trust, in which case a will is necessary. For instance, personal items such as jewelry that are not transferred to a revocable trust need be disposed of by a will.
Furthermore, living trust sales are a growing area of consumer fraud and create risks for elder financial exploitation.[9] A trust mill is a scam in which trust marketers deceptively try to sell individuals, typically seniors, an investment under the guise of a revocable trust.[10] Often times sales agents work for an insurance company that is created solely for the purpose of churning out living trusts.[11] In those scams, the sales agents will gain access to seniors’ financial information and persuade them to cash retirement savings and purchase a prepackaged bundle of trusts for a substantial fee and for which they receive commissions.[12]
However, those so-called “living trusts” in the scams rarely accomplish the settlors’ goals. The main objective of certain trust promoters is to gain access to victims’ financial information and recommend that they liquidate assets to purchase insurance or annuity contracts.[13] Courts in a number of states have also found trust-marketing endeavors by nonlawyers to constitute the unauthorized practice of law.[14] Some of these trusts are invalid and defective. For instance, Florida children learned after their mother’s death that she had purchased a revocable trust that was invalid under Florida law.[15] The mother initially purchased the revocable trust to avoid the costs of probate, but because the trust was invalid and she left no will, her entire estate had to go through probate rather than being distributed following her own wishes.[16] Vulnerable elders often become victims of trust mills because they want to avoid probate and legal costs.
As an alternative to guardianship and a will substitute, revocable trusts can have many advantages, including avoiding the public probate proceedings and keeping things private.[17] However, revocable trusts do not always replace the need for a will, and sometimes overlooked are their disadvantages and the risks of revocable trust scams.
[1] Revocable Trusts, Am. Bar Assoc. (last visited Mar. 26, 2022), https://www.americanbar.org/groups/real_property_trust_estate/resources/estate_planning/revocable_trusts/.
[2] Living Trusts, Nat’l Acad. Elder L. Attorneys (last visited Mar. 26, 2022), https://www.naela.org/Web/Consumers_Tab/Consumers_Library/Consumer_Brochures/Elder_Law_and_Special_Needs_Law_Topics/Living_Trusts.aspx.
[3] Julie Garber, The Pros and Cons of Revocable Living Trusts, The Balance (Jan. 8, 2022), https://www.thebalance.com/pros-and-cons-of-revocable-living-trusts-3505384.
[4] Frances H. Foster, Trust Privacy, 93 Cornell L. Rev. 555, 557–58 (2008).
[5] Garber, supra note 3.
[6] The Probate Process in Virginia, VAELA (last visited Mar. 25, 2022), https://www.vaela.org/probate-process-virginia.
[7] Foster, supra note 4, at 557.
[8] Garber, supra note 3.
[9] Christopher Elliott, Beware of These New Estate Planning Scams, Forbes (Jul. 16, 2018, 08:59 AM), https://www.forbes.com/sites/christopherelliott/2018/07/16/beware-of-these-new-estate-planning-scams/?sh=1cff2b131506.
[10] Heleigh Bostwick, Trust Mills: What to Watch Out For, LegalZoom (Aug. 7, 2017), https://www.legalzoom.com/articles/trust-mills-what-to-watch-out-for#:~:text=A%20trust%20mill%E2%80%94also%20called,of%20churning%20out%20living%20trusts.
[11] Id.
[12] Angela M. Vallario, Living Trusts in the Unauthorized Practice of Law: A Good Thing Gone Bad, 59 Md. L. Rev. 595, 596 (2000).
[13] Id.
[14] E.g., People ex rel. MacFarlane v. Boyls, 591 P.2d 1315, 1316 (Colo. 1979); The Fla. Bar v. Senior Citizens All., Inc., 689 So. 2d 255 (Fla. 1997); see also Vallario, supra note 12, at 607.
[15] Foster, supra note 4, at 590.
[16] Id. at 591.
[17] Foster, supra note 4, at 557-58.