What Can I Not Do as Trustee of a Revocable Living Trust?

Wills and living trusts are two of the most fundamental estate planning documents. While both direct the distributions of your assets to your desired beneficiaries after you pass away, a revocable living trust provides added flexibility and functionality, including incapacity planning.

Like other types of trusts, there are three roles under a revocable living trust:

  • The person who creates the trust, called the trustmaker, grantor, or settlor;
  • The person who manages the trust assets, the trustee;
  • The person who receives money and property from the trust, called the beneficiary.

Before setting up a revocable living trust, you should understand what you can—and cannot—do as trustmaker and trustee. Living trusts are complex legal documents that need to be drafted carefully with help from an experienced estate planning attorney.

Two Phases of a Living Trust: Today and Tomorrow
The living trust is a powerful tool that affects your life today and throughout events into the future, such as incapacity or death.

The Living Trust While You Are Alive
After creating a trust, as the trustmaker, you must retitle assets that you want to be transferred to the trust—such as real estate, bank accounts, and investments—from your name to the name of the trustee. Even after this transfer, as trustee, you retain control over the assets and will manage them for your benefit throughout your lifetime while you are able.

Any time before your death, as the trustmaker, while you are mentally capable of managing your affairs, you have the legal authority to alter, amend, or even revoke the living trust. For example, you can place additional money or property in the trust or take money and property out of the trust, make investment decisions about the trust’s accounts, add or remove beneficiaries and successor trustees, and change the rules regarding when and how your beneficiaries receive their inheritance.

However, because it is your trust and you retain control over the trust’s accounts and property, there are some things you cannot do.

  • You cannot use the trust to shield or protect assets from your creditors.
  • You cannot avoid paying taxes on income earned by the trust. Because no separate tax identification number is required for trust income, income on the trust’s accounts and property must be reported on your personal tax return.
  • You cannot perform trust-related business, like making investments, taking disbursements, and paying taxes, individually. You will need to sign as the trustee instead of as an individual. This limitation is manageable, however. It usually means you will sign as “Sam Smith, Trustee of the Sam Smith Trust” instead of “Sam Smith.”

The Living Trust After You Die (or Become Incapacitated)
When you pass away or become incapacitated and unable to administer the trust yourself, a successor trustee of your choosing takes over trust administration, following the instructions you provide in the trust document.

Depending on the trust’s terms, the successor trustee may be responsible for managing the trust’s assets for an extended period on behalf of the beneficiaries and terminating the trust and distributing its money and property to the beneficiaries. If you become incapacitated, the successor trustee can serve in this role for as long as you are unable to manage your affairs. While you are alive and unable to manage your affairs, you are not allowed to be a trustee, but you will still be a trust beneficiary, so the assets you placed in the trust continue to be used for your benefit.

Many revocable trusts will close within a few years of the trustmaker’s death. Some may remain open for years, for example holding accounts and property for a minor beneficiary until they reach a certain age or milestone, as specified by you in the trust agreement. You should name a backup successor trustee in case something happens to the original successor trustee and they can no longer serve.

Get an Estate Plan That Fits Your Needs and Goals
In creating a living trust, you take on may roles. You are the creator of the trust, the initial trustee, and the beneficiary. Each role comes with unique powers and duties that apply both now and upon the occurrence of certain future events, such as your incapacity or death.

Please contact us today to schedule an appointment so you can learn more about these roles and duties. Let us help you then create your estate plan in a way that will best meet your goals.