Introduction

    There are three primary ways by which assets titled in the name of a person, or owned by that person, pass to heirs and beneficiaries
    on his or her death.  First, they can pass through one’s last will and testament.  Second they can pass automatically by operation of
    law as in the case of joint ownership with another (e.g., real property titled tenants by the entireties to a husband and wife).  Third,
    they can pass by virtue of a survivor or beneficiary designation within the instruments which control the assets, as is common for bank
    or brokerage accounts.

    The terms "property" or "assets" encompass both tangible and intangible property, real estate and a category of property known as a
    “chose in action.”  Examples of tangible property include objects, such as antiques, automobiles or tools.  Intangible property includes,
    for example, stocks, bonds and money.  Real estate includes all forms of real property ownership, including buildings, condominium or
    cooperative interests, vacant land and even timeshare ownership.

    A chose in action is a little more complicated.  For the purpose of this discussion, a chose in action is a right to receive something of
    value, a right which has not yet come to fruition because its receipt is dependant upon the passage of a specific period of time or the
    occurrence of a certain event, neither of which has occurred.  Once the triggering time has passed or event occurred, the person will
    then come into possession of the asset.  An example of this type of asset is the right to recover an unpaid debt or to receive an as yet
    unpaid settlement in a lawsuit.

    A will does not control the distribution of all of a person’s assets.  A will only controls property, regardless of its type, to which the
    decedent has legal title, or ownership, regardless of whether the decedent at death has physical possession of the property, so long
    as he or she is otherwise entitled to possession of the asset.

    Property, regardless of its type, which is held in a trust does not pass on the death of a decedent in any one of the above three above
    ways.  Assets which are held in a trust, even where one may have physical possession of the assets, are neither titled in the name of
    the individual decedent nor owned by the decedent; rather, those assets are owned by and titled in the name of the trust.  
    Accordingly, when he or she dies, the last will and testament does not control distribution of trust assets, unless, of course, the trust
    agreement itself stipulates that the trust assets, or some portion of those assets, will be paid to the decedent’s estate on his or her
    death for the express purpose of distributing those assets in accordance with the distribution scheme contained in the will.

    Persons who are entitled to possession or use of assets held in trust are merely trust beneficiaries, having only a beneficial interest in
    the assets.  Beneficiaries are only entitled to some specified interest, such as a stream of income, from a trust, and do not own the
    trust assets, unless and until transferred from trust ownership to individual ownership.  So, a trust instrument could provide future
    transfer of an asset to a beneficiary, or it could provide for future divesting of a beneficiary’s interest in or claim to any trust asset.  In
    short, the disposition of trust assets, including their future beneficial use, is always controlled by the distribution scheme–by the terms–
    contained within the four corners of the trust instrument, or trust agreement.

    In recent years revocable living trusts have become an increasingly popular tool in estate planning, often as a supplement to a will;
    occasionally as a nearly complete substitute for a will.  A trust is a separate and distinct legal entity which can own, maintain and
    control assets separately from the Settlor who creates the trust.  A trust can only act through a Trustee and even where the Trustee
    may also have been the Settlor, the trust is the legal entity which owns the assets which have been transferred to it.  A trust offers a
    way for a Settlor to separate himself or herself from his or her assets, thereby allowing for easy and even automatic passing of assets
    to designated heirs and beneficiaries, either while the Settlor is still living or upon his or her death.  In both cases, the assets can pass
    to the heirs and beneficiaries without the intervention or oversight of a third party or a court probate proceeding.

    Common Trust Usages

    In Virginia, if you own real estate which is mortgaged, whether you realize it or not, you are already a principal participant in a living
    trust.  The instrument by which you pledge the real property for repayment of your mortgage loan is a deed of trust in which you are
    the Trustor.  As the Trustor, you convey your property, in trust, to a designated Trustee, who has the power to take possession of
    and sell your real estate in the event of default on the loan.  You and your lender are the beneficiaries of the trust.  You as
    beneficiary have control over and possession of the property.  The lender as beneficiary is entitled to receive repayment of your
    mortgage loan.  The lender also has a very important inchoate right–that is the right to invoke the power of sale you have vested in
    the Trustee in the event of default on your loan and to direct the Trustee to foreclose on the real property lien created by the deed of
    trust.

    Another form of trust, often used for asset protection purposes, is a land in which trust title to a particular parcel of real estate is
    placed in trust, in a title holding arrangement designed to put a firewall around the property, and further designed to protect the
    anonymity of the real parties in interest, the real owners, by keeping the real owners' names out of the public records.

    Other common forms of trusts include:

  • A spendthrift trust, used to protect a beneficiary’s assets from his or her creditors, or from his or her own financial
    irresponsibility.
  • A credit shelter or bypass trust, used to limit the size of a surviving spouse’s estate which would be subject to estate taxes and
    to take maximum advantage of estate tax exclusions (see Estate Tax Planning) for the first spouse to die.
  • A special needs trust, designed to help a disabled person who might otherwise lose Social Security or Medicaid benefits if he or
    she receives an unexpected windfall, but still allows use of trust assets to supplement his or her needs without affecting those
    benefits.
  • An irrevocable life insurance trust, often used to fund payment of estate taxes, which if properly established removes the life
    insurance benefit from the decedent’s estate for the purposes of calculating estate taxes due.

    The use of trusts is only limited by one’s imagination.  Trusts can even be used to provide for the care, housing and interment of a pet
    long after the death of the pet’s owner.  If you own real estate in more than one state, your heirs could benefit from having a living
    trust for that real estate, in that your estate upon your death would not need to be submitted to probate in each state where your
    property is located.  If you have a living trust, probate is unnecessary where the title to the real estate is held in the name of the trust.
    As mentioned earlier, trust property is not subject to either oversight or intervention of court probate proceedings.

    Additional Estate Planning Points to Consider

    There are many arguments for and against the use of wills and for and against relying on trusts for the distribution of ones assets
    upon one’s demise.  Many tout the benefits of using a revocable living trust as the primary tool in estate planning.  While both wills
    and trusts have their advantages, neither is perfect in all circumstances, and the choice one makes is entirely dependant upon
    personal preferences, the size and complexity of one’s estate, and whether there are any specific issues or problems which must be
    addressed as part of one’s estate planning.  As a general rule, however, while a will may sometimes be used alone, without a
    revocable living trust, when using a revocable living trust as a primary estate planning tool, it should always be supplemented with a
    will.  

    Some additional points which must be considered in reaching a decision are as follows:

  • A trust can control any type of property; however, a trust will only control that property which has been legally and properly
    transferred into it.
  • A properly drawn will can disinherit absolutely anyone except the decedent’s spouse, unless an enforceable prenuptial
    agreement specifically allows for the disinheritance of the surviving spouse.   In the absence of an enforceable prenuptial
    agreement, if a will attempts to disinherit the surviving spouse, the spouse can still claim a share of the estate.  In Virginia
    disinheritance of a spouse is precluded by what is known as the “augmented estate” rules, which provide that a spouse may
    claim one-third of the decedent spouse's estate, including an “augmented amount,” if the decedent left surviving children, or
    their descendants, and one-half if the surviving spouse is not survived by children, or their descendants.   Stated in very basic
    terms, the augmented estate equals the probate assets of the decedent, plus assets passing upon the decedent's death
    outside the probate estate, plus certain transfers by the decedent spouse during his or her lifetime, minus assets received by
    the surviving spouse from the decedent spouse through probate and non-probate means.
  • Because of the Virginia augmented estate rules, assets placed in a revocable living trust, whether or not done so with the
    intention of disinheriting a spouse, most probably would come back into the decedent’s estate, should the surviving spouse
    claim a share of his or her estate.
  • Passing property through the use of a will is rarely the least expensive way to do it, although in some jurisdictions, particularly
    Virginia, estate expenses are rather nominal.  The probated will is a more public and a generally more time consuming way to
    pass assets to heirs and beneficiaries than a revocable living trust.
  • At death, the distribution scheme of a living trust, whether irrevocable or  revocable trust, can generally work exactly as a will
    does, without the delay and expense involved in probating a will.
  • Both wills and revocable living trusts may be changed at any time by their principals.  An irrevocable trust generally may not be
    changed once created.
  • Both wills and living trusts can be created while the principal is alive and so long as he or she is competent to do so.
  • Trusts generally do not need to be made part of the public record, while wills become public when filed with the probate court.

    How Does a Trust Operate?

    There are always three parties involved in a trust: (i) the Settlor, also known as the Trustor or the Grantor, who creates the trust
    agreement; (ii) the Trustee, sometimes also called the Grantee, who holds title and sometimes possession of all or a portion of the
    corpus of the trust, and carries out the instructions in the trust agreement; and, (iii) the beneficiary, who receives or will receive the
    benefits from the assets held in trust.   Any given trust agreement may have multiple Settlors, Trustees and beneficiaries.  A common
    example of such multiples would be a living trust established by a couple, where each is a Settlor, each is also designated a Trustee,
    and each is a beneficiary of the trust.

    A trust is created using a trust agreement, usually in writing.  Although oral trust agreements may in general be enforceable, a written
    agreement is clearly preferable so there is no misunderstanding about who is responsible for what, about the powers and duties of
    the Trustee, and most important, so that it is clear how assets are managed, controlled and dispensed from the corpus of the trust.   
    Certain matters related to usage of trusts which must be in writing.  In particular, real property must be conveyed with a written
    instrument, a deed, into the trust for it to be controlled by the terms of the trust agreement.

    Agreements which are ambiguous can be difficult to enforce, leave too much to interpretation and thus, a clearly written, well thought-
    out trust agreement is essential for accomplishing the goals of the Trustor.

    Most Common Structure of a Living Trust As an Estate Planning Tool

    There is no single or standard form for a living trust.  Individuals differ, and their trust agreements will differ.  Most simple trust
    agreements, just like wills, tend to follow a common structure, with variations, additions and subtractions appropriate for the Settlor in
    each case.  The most common structure begins with the Settlor’s identity and domicile, followed by a statement announcing the
    creation of the trust, a designation of the Trustee and a statement of conveyance unto the Trustee of the assets to be placed in the
    trust.

    Next the agreement should clearly specify who receives the benefits of the trust during the lifetime of the Settlor, under what
    conditions, for how long, and such other lifetime instructions as the Settlor may deem appropriate.   This should be followed by
    directions for the disposition of the assets upon the death of the Settlor, first through any specific gifts of property to beneficiaries,
    then for distribution of the residuary corpus of the trust.  Residuary distribution instructions are generally the most important part of
    the trust agreement because they usually address the bulk of the trust assets.

    Outright gifts may be made to a single beneficiary or property may be gifted to a class of two or more beneficiaries in various or equal
    amounts.  Also, the distribution scheme could call for a complete transfer of particular assets to particular beneficiaries, or direct that
    the assets remain in the trust, with the beneficiaries receiving income from all or a portion of the trust assets for a specified time
    period or until the occurrence of a particular event.

    The trust agreement must also outline the conditions under which the Trustee will be replaced, whether in the event of the death or
    the incapacity of the original Trustee.  The agreement should contain the name of any successor Trustee and a clear grant of powers
    to the Trustee, whether original or successor.   Powers conferred upon the Trustee may be listed in detail or incorporated by
    reference, such as by stating, for example that, “the Trustee shall have all those powers enumerated in Section 64.2-105 of the Code
    of Virginia.”

    In preparing for the making of a living trust agreement, you must decide whom you want to act as Trustee and whether you wish to
    limit the Trustee’s powers.  You must also decide the extent to which you wish to detail your distribution instructions to the Trustee, or
    whether you wish to invest the Trustee with broad power and discretion to administer the trust, using his or her best judgment as it
    may apply to the various circumstances which will occur in the future when you may no longer be around.  It is also important to
    designate at least one alternate or successor for each Trustee named.

    As difficult as it may be, when you are dealing with children to be cared for from the proceeds of the trust, you must decide when and
    under what circumstances you want the children to receive their respective shares of assets in trust–as soon as they reach the age of
    majority, held until a later age, or perhaps held until each or all finish college.

    Conclusion

    If your decide to use a revocable living trust in your estate planning, don't try to make a trust agreement which you will never need to
    change.  Plan for an agreement that will endure for as long as is reasonably practicable, but do not hesitate to change, or even
    revoke, the trust agreement as your circumstances change.

    Whether you choose to use a will or a living trust, or some combination of the two, your decision should be based on careful and
    thoughtful contemplation of all your personal and financial circumstances.  Do-it-yourself wills and trusts are available from a variety of
    sources; however, there is no substitute for sound and learned advice.  You should consult your legal and financial advisors as part
    of  your decision process.

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LLOYD MARTIN PLC
[A Virginia Professional Limited Liability Company]
Do You Need A Living Trust?
LLOYD MARTIN PLC
9316-A Old Keene Mill Road
Burke, Virginia 22015-4285
703-584-7744
(F) 703-584-7746
lmartin@pwtitle.com