Oklahoma Bar Journal
Use of a Revocable Living Trust as a Preferable Alternative to Probate: General Observations and Pitfalls to Avoid, Part 1
By Maria Tully Erbar and Andra Erbar Peterson
This article is intended to address some of the potential factual circumstances which in due diligence should be explored, as well as situations where unforeseen circumstances can involve a trust in unwanted battles between the laws applicable to wills and contract and property law-based principles of trusts.1 Frequently as a general practitioner, you may experience a client wanting some “estate planning,” but who is ignorant of what the term entails and usually quite uncertain about any details relating to the matter.
In these situations, a good place to start is to assess where the client is – and then determine her estate-planning goals. The client’s starting point might be a concern that “the government is going to take all my money” or “the lawyers and courts will wind up with most of it anyway.” These cavils are often raised by those clients who do not subscribe to publications such as Forbes, but they present good opportunities to start a meaningful discussion about the client’s estate planning needs. You can disabuse your client of that ever-present fear of “death taxes” by telling her that Oklahoma has repealed estate and gift taxes and there is not even a requirement to file a federal estate tax return for estates whose total valuation does not exceed $11,580,000,2 and thus tax avoidance is usually only a concern for the ultra-rich.
BENEFITS OF A LIVING TRUST
From the topic of estate taxes, you then segue into an introduction to the benefits of a living trust3 and explain it provides many useful advantages to consider as an alternative to the traditional probate method of winding up one’s post-death affairs and distributing the estate. Often, after an explanation that the client does not need to base her estate plans on the avoidance of tax exposure, the client will ask whether or not there is any need for an estate plan. She should be told there is such a need, unless she wants to let the court distribute her estate according to the laws of intestacy. The two best methods to achieve the client’s testamentary goals are either by wil4 or through a trust.5 A revocable living trust is usually more efficacious than a simple will; it offers more flexibility and provides helpful lifetime management tools; and it will almost invariably save the client (and/or the objects of the client’s future bounty) a great deal of time and money in the long run. At this juncture, the client needs to know about the relative costs of probate versus the administration and termination of a revocable trust. Although attorneys charge much more for creation of a trust-centered “estate plan” than for a simple will, trusts – if properly drafted and maintained – can serve not only as functional equivalents of a will, but they also, “unlike wills, are management arrangements that offer significant benefits unavailable from wills during the settlor’s lifetime.”6
It is essential for the attorney to be aware of some particular considerations that may impact drafting decisions in formulating a trust-centered estate plan. As with any aspect of the practice of law, the first rule of the drafter in preparation of a trust instrument is to know the facts. The lawyer should be fully familiar with the client’s distributive intent, the extent of her estate, her family status and her personal history. Knowledge of these facts is essential research to enable the attorney to avoid, insofar as possible, unforeseen circumstances that could result in legal battles with family members or other putative beneficiaries who believe they were treated unfairly in the distributive directives of the trust.
Several questions should be answered by the client. For example, how is title to real property or other assets that will be put into the trust held? Are bank accounts maintained with a “P.O.D. clause?” What other, alternate arrangements for transfer has the client erected (perhaps unwittingly) as bars to the efficient and complete administration and ultimate transfer of this estate through the mechanism of her trust? Who are the named insurance beneficiary(ies)? Does the client have an antenuptial agreement? Lacking a thorough working knowledge of all these facts before drafting and executing documents often leads to the creation of an imperfect estate plan. For example: Client wants her home in the country (Blackacre) to be distributed equally between her nephew, Jimmy, and her niece, Mary Jane. However, she has unfortunately forgotten to advise that a few years ago, she deeded Blackacre to herself and Jimmy as joint tenants. If this oversight is not caught and corrected, your client’s transfer of her beautiful homestead to the trust will operate only as a severance of the joint tenancy,7 and the client’s estate-planning revocable trust will possess only a one-half interest as tenant-in-common while Jimmy will have an equal interest outside of the trust.
Final result: Jimmy has three-fourths interest, and Mary Jane has only a one-fourth interest. Mary Jane, who was informed by her aunt that she and cousin Jimmy would share equally in the estate, will be extremely disappointed by her aunt’s trust. In the worst-case scenario, Mary Jane will be pounding on your door, writing bar complaints about you – or even consulting another lawyer about suing you. Foresight and caution can avoid this unfortunate and unintended result.
Enlarging this hypothetical scenario illustrates a flaw (or at least a curiosity) in our existing law: suppose that Mary Jane discovers this problem only days before auntie would have expired by natural causes, and in a heated confrontation, she kills her aunt. Under this circumstance, it appears Mary Jane would still receive a one-fourth interest in Blackacre, although if auntie had used a will instead of a trust for distributive purposes, Mary Jane would be out of luck. Oklahoma’s version of the “slayer statute” (84 O.S. §231) clearly bars testamentary inheritance from the deceased victim of the beneficiary’s wrongful, criminal act, but the statute may not apply to a trust distribution.8 Thus, in drafting the trust, one should consider inclusion of a clause barring benefits from the trust to anyone who slays the settlor.
The foregoing fiasco in the division of Blackacre presents just one example of a troublesome circumstance that might have been avoided by careful drafting. There are a plethora of others. The better practice would require the lawyer to independently ascertain how all the client’s property is held, so that necessary and appropriate changes and transfers may be made to enable a seamless and effective estate plan. Another necessary step is to conduct a complete review of the client’s family and marital history. Has the client been married before, and could there be any lingering transfer restrictions from an earlier divorce? Or was any promise ever made (for example, in a heartfelt, handwritten graduation note) that auntie was going to give Mary Jane a million dollars? Is there another child from some earlier liaison who, though never in attendance at family gatherings, might surprisingly show up on the courthouse steps?
These are just some of the reasons you should employ a detailed questionnaire to be completed by your estate planning clients. All these circumstances and more need to be explored, and the time and effort such exploration will take needs to be factored into what the client will be charged. Once this is explained to the client, she might decide there is nothing to worry about and opt to proceed without these investigations into the ownership of the intended trust res. In this event, you should recommend the client sign a waiver form that shields the attorney and her office from responsibility for mishaps that might occur because the client provided incorrect or incomplete information. After the attorney has been satisfied that she has a clear picture of the terrain upon which she will be operating, it will be easier to properly draft provisions of the trust that comply with the client’s wishes and that anticipate insofar as possible pitfalls that may later arise before the trust is finally determined and distributed. In the remainder of this article is a very brief survey of some – though certainly not all – of the legal quagmires to anticipate and (if possible) to avoid.9
CIRCUMSTANCES OF A MARRIED COUPLE
Let us begin with the circumstances of a married couple. Do they want a joint (or “marital”) trust or two separate trusts, each mirroring the other? The answer to this question has to be, “it depends on the circumstances.” A joint trust can function quite efficiently for a married couple with no internal family discord, no prior marriage or children from outside the union and no significant separate income or estate belonging to either of the partners. However, the drafter still must be cognizant of matters which, if not discussed at the time of preparation of the estate plan, may well become troublesome hurdles at a later stage of the estate plan. For example, the perennial worry in such a situation seems to be that after the first spouse dies, the surviving spouse will marry again, and the focus of attention may move away from the children of the first union. What will prevent the surviving spouse from changing the distributive terms of the (formerly) joint trust?
Here are some suggestions to avoid such a disruption of the estate plan. A joint trust (often called something like “The Smith Family Trust”) clearly should state that it is contractual in nature and origin, that it is to provide for the settlors during their lifetimes with the survivor continuing to be cared for and to have the continuing right of day to day trust management, but that amendments can only be made by joint action of the settlors/trustees so that upon the death or incapacity of the first of them, the trust becomes irrevocable, and its terms – including designation of the final beneficiaries – are fixed contractually.10
In order to fully protect the client’s trust concerning the irrevocability issue, it is advisable the trust instrument denotes the final beneficiaries (that is, the children of the marriage who might otherwise be lumped in the “by descent” grouping and constituting only the remainder interest) and also that it provide those beneficiaries a small, annual income in order to establish in them a present interest by purchase. This drafting suggestion is in response to Section 175.41 of the Oklahoma Trust Act11 that requires all holders of an interest by purchase to agree to revocation of a self-styled “irrevocable trust.”
It is the “by purchase” proviso that is the source of potential trouble, because this means that if children only have a contingent interest in the remainder, they take such interests by descent, and the surviving spouse would be the only interest holder whose consent is necessary to invoke the formerly “joint” decision to revoke (or amend) the trust. Fortunately, Black’s Law Dictionary provides us with a definition of an interest “by purchase” as an “acquisition ... by any means whatever except by descent,” which definition has been recognized by Oklahoma in Oklahoma City v. Board of Education of Oklahoma City,12 citing Kohl v. United States.13
In this suggested iteration of the proposed subject trust, the children would not take their present annual income interest as an inheritable interest or by descent, but as current, named beneficiaries – that is, by purchase rather than by descent. Thus the trust, which by its terms becomes irrevocable upon the death or incapacity of the first trustor, cannot be transformed back into a revocable status except upon agreement of the surviving spouse and all named children, according to the requisite terms of the governing statute.14 The case of In re Living Trust of Reid15[xv] offered a similar result (upholding the integrity of the original trust) in a circumstance wherein an amendment that changed the ultimate disposition of assets, but which was offered subsequent to the grantor’s death in an attempt to achieve a distributive outcome was rejected. The court stated “where the settlor reserves the right to amend a trust during his or her lifetime, and conditions effect of the amendment on a written notice of the change delivered to the trustee, but while living fails to deliver the notice to the trustee, the undelivered amendment is ineffective to alter the terms of the trust. To hold otherwise absent a specific trust provision permitting amendment by will would permit the modification of a trust – although subject to amendment, modification or revocation during the life of the settlor – after the trust by its own terms became irrevocable and immutable to change upon settlor's death.” By so ruling, the Trust of Reid court erected another circumstance to bolster the permanence and irrevocability of a trust instrument, based upon adherence to the contractual terms within the instrument itself.
OTHER CHALLENGES TO OVERCOME
There are other challenges to be overcome, including issues concerning the enforceability of a “joint and mutual” instrument when one party seeks a change to its terms by claiming a forced share under the forced heir provisions of intestate succession.16 Do the trust’s terms prevail over spousal elections? Under the principles discussed previously related to circumstances where the trust indenture created parties vested with an interest earned other than by descent, inclusion of all assets within the inter vivos trust leaves no property upon which a probate administration could be had. Further, were the surviving spouse to attempt to create an administrable estate for distributive purposes contrary to the terms of the trust, (an event analogous to the case in Robison, supra), participation in and receipt of benefits under the trust should be viewed as an estoppel barring such act.
Issues of surviving spousal powers or of reconciling trust provisions with the spousal election pale when measured against the fallout that arises when trust provisions collide with the laws governing property division upon the dissolution of the marital union. Do the distributive trust provisions (and for that matter, the status of the property held by the trust) remain – or does the divorce tear them asunder with the marriage? Can the rights of a third-party beneficiary established in an antenuptial agreement be enforced following the divorce of the contracting parties? What is the significance of “property acquired by joint industry during coverture” in the context of wills and trusts? Does marital property retain its marital character upon its transfer into a trust? What protections for pretermitted heirs and surviving spouses can be implemented in drafting a revocable trust? The attorney should anticipate all of the questions raised in this article in connection with the use of a revocable trust in estate planning, along with other issues and drafting suggestions that will be addressed in a future article.
Author’s Note: Ms. Erbar wishes to acknowledge her gratitude to the late Patricia Flanagan for her encouragement in the development of this article.
ABOUT THE AUTHORS
[photo – Erbar Peterson (both authors)]
Maria Tully Erbar is a solo practitioner at Maria Tully Erbar, Attorney at Law P.C. in Oklahoma City. Her practice is focused primarily on probate, trusts, guardianships and family law matters. Ms. Erbar is a member of the OBA Estate Planning, Probate and Trust Law Section, as well as the Family Law Section.
After attaining her M.A. in vocal performance from OU, Andra Erbar Peterson spent several years singing professionally. She is a 3L at OCU Law with interests in wills and estates, family law, health law and immigration law. She is currently a legal intern for Oklahoma Family Network and Oklahoma City County Health Department and is a licensed realtor.
- See generally, Newman, Alan, “Revocable Trusts and the Law of Wills: An Imperfect Fit” (2008), Akron Law Publications, 169, https://ideaexchange.uakron.edu/ua_law_publications/169.
- As of 2020, this was the threshold amount above which a requirement for filing operates. This amount increases to $11,700,000 with the advent of 2021. The amount includes the total of the taxable valuation of the deceased’s estate and prior taxable gifts. See IRS website and related statutes and regs for details.
- “Living trust” is the term commonly and widely applied to revocable trusts wherein the settlor retains complete control while living and compos mentis. They also provide for the disposition of the settlor’s estate upon death but can also provide for the settlor’s personal use of her largesse during her life, her maintenance without court oversight in the event of her subsequent incapacity or incompetence and can also usually offer the benefit of privacy to the settlor and her family with respect to dispositive plans for her assets. Clients invariably find that once they get their trust set up and functioning, their circumstance feels no different than pre-trust. However, by electing a trust-centered estate plan, they have (hopefully) eliminated the need to ever use or be subject to a guardianship or conservatorship, invoking provisions of a Power of Attorney, and eventual court supervision of their estate during the probate process. You should include a durable POA, nomination of guardian and pour-over will in every estate plan, but, with due diligence and careful drafting – and the client’s careful attention to a few practical details – these documents may very well never be utilized. Other useful benefits of a trust-centered plan include the ability to plan for interactions with Medicaid, for a special needs trust and other specialized purposes that are not covered in this article. A trust requires a settlor, object, beneficiary and any necessary operating and ending instructions; there is any number of basic forms to be found as drafting aids. This article does not deal with the routine structural details, as they are widely available to the general practitioner. Rather, attention is paid to additional, particular aspects and considerations that may impact certain drafting decisions concerning your client’s trust-centered estate plan, other than the aforementioned tax-planning possibilities. Also, this article does not venture into the many management tools and efficiency arrangements that a trust can offer while the settlor still lives.
- Needless to say, of course, there is always an essential part of the trust-centered estate plan that is a will – the too often underused “pour-over” variety. A pour-over will, discussed in the second installment of this article, acts as a very useful guard against possible subsequent trouble from omissions to the trust or after-acquired property, but the will is a prophylactic rather than a driving force for the estate plan.
- [A revocable trust is] “... an ambulatory instrument that speaks at death to determine the disposition of the settlor’s property.” Matter of Estate of Tisdale, 855 N.Y.S.2d 809 (Sur. Ct. 1997).
- See generally, Newman, op cit.
- Shackelton v. Sherrard, 1963 OK 193, 385P.2d 898: A joint tenancy terminates upon “any act which is inconsistent with its continued existence.” A deed by one joint tenant to a third party severs the joint tenancy and creates a tenancy in common. The “four unities” required to establish and maintain a joint tenancy are still alive and well in Oklahoma. See Valdez v. Occupants of 3908 SW 24th Street, Oklahoma City, 2011 OK 99, 270 P.3d 143.
- The statute does not specifically mention trust distribution, and the closest it comes is the statement that reads, “No person ... shall ... receive any interest in the estate of the victim ...” However, it could well be argued that a trust distribution is not from the estate of the deceased, but from a separate and distinct entity previously created by the deceased. The reader is directed to an excellent article by Judge Gregory C. Blackwell, “Property: Creating a Slayer Statute Oklahomans Can Live With,” 57 Okla. L. Rev. ____, (2004) wherein the deficiencies of the current statute are thoroughly discussed. The article suggests we should shift our language to “expectancies” and says in part: “There are some rights that are expectancies upon which everyone can agree. Rights gained under a will, through intestacy, and by contract all traditionally fall into this category. Some rights are more difficult to categorize, such as the right of survivorship in jointly owned personalty, powers of appointment, irrevocable trusts, other will substitutes, vested remaindermen, and cases where “a donor names the slayer as a default taker, subject to a power exercisable by the victim. ... These are all examples of problem areas that a slayer statute should specifically address.” (Footnotes omitted.)
- The reader will no doubt notice the several references to and discussion about probate cases in the following discussion. Trust and wills are both methods whereby a person can accomplish, inter alia, a directive for passing her estate to others upon her demise. Wills and related probate (wills and intestate succession) have a much longer and more varied history; it is often upon these cases that current conflicts are decided, and it is often useful to attempt to analogize from probate to trust law. The effort is commendable – and probably the best path through unexplored territory – but results are not always the same. “... [T]he trend in both statutory and case law is to subject trusts, and persons interested in them, to the same law that would apply if the settlor had instead used a will to provide for the disposition of her property at her death. ... while there are many revocable trust issues that are being, and should be, resolved by reference to the law of wills, there are many others for which that is not the case.” Newman, op cit.
- As a caveat, it should be pointed out that although contractual provisions in joint and mutual wills have been recognized and upheld by Oklahoma courts, the provisions of 84 O.S. §52 (allowing for revocation of joint and mutual wills) notwithstanding, the cases are not without difficulties. In Matter of Estate of Whiting, 1990 OK CIV APP 6, 789 P.2d 255, the Court of Appeals reasoned the statutory language “cannot, in our opinion, be expanded to prohibit people from validly contracting to achieve irrevocability of their mutual wills.” Later in the same year (1990), the Supreme Court seemed to add a requirement upholding the contract irrevocability in cases where the surviving spouse had benefitted by taking under the joint will, as a form of ratification by estoppel, in Robison v. Graham, 1990 OK 93, 799 P.2d 610. A similar issue is addressed in the Trust Act at Section 175.41, discussed below.
- The act is found at 60 O.S. §§175.1 et seq; §175.41 reads: “Every trust shall be revocable by the trustor, unless expressly made irrevocable by the terms of the instrument creating the same. Provided, that any trust may be revoked by the trustor upon the written consent of all living persons having a vested or contingent interest therein. The term ‘contingent interest,’ as used in this section, shall include an interest which a beneficiary may take by purchase, and exclude any interest which a beneficiary may take by descent. Provided further that this section shall not apply to a spendthrift trust unless same is created by the trustor for his own benefit.
- 1938 OK 1, 75 P.2d 201.
- 91 U.S. 367, (1875) 23 L. Ed. 449.
- See Harrison v. Johnson, 1956 OK 201, 312 P.2d 951.
- 2002 OK CIV APP 49, 46 P.3d 188.
- 84 O.S. §44.
Originally published in the Oklahoma Bar Journal – OBJ 92 Vol 4 (April 2021)