New York attorneys have often looked closely at what revocable inter vivos trusts (RIVTs) have to offer as a testamentary substitute only to ultimately recommend against their use in favor of a Will. Although immensely popular in California and Florida, “living trusts” have yet to gain a significant presence as a testamentary substitute in New York.
A major factor accounting for the relegated status of RIVTs in New York has probably been the lack of clear statutory guidance involving their use. Recently, however, Governor Pataki signed legislation which resolves many of the questions that had previously plagued the use of RIVTs. The new law applies to RIVTs executed after June 25, 1997.
New EPTL §7-1.15 provides that “[e]very estate in property may be disposed of by lifetime trust.” RIVTs are inherently attractive since they permit title to assets to be passed to beneficiaries without probate. New EPTL §7-1.16 provides that a lifetime trust instrument must specifically designate the trust as revocable. Otherwise, it will be deemed irrevocable. Although the new law also applies to irrevocable inter vivos trusts, this article will focus on revocable trusts. (Irrevocable trusts are often used to hold appreciating assets, such as life insurance policies, or real property. Property placed in an irrevocable trust is generally excluded from both the probate and taxable estates. Thus, these trusts can also serve important estate planning purposes.)
RIVTs bear a close resemblance to Wills, in that both may be revoked or amended by the grantor (or testator) at any time before death. In certain important respects, however, RIVTs are more flexible than Wills. For example, testamentary trust provisions appearing in Wills do not operate until death, since the Will itself does not “speak” until death. Dispositive provisions of RIVTs, on the other hand, accomplish important lifetime estate planning objectives, since RIVTs also operate during the grantor’s life.
The “merger” doctrine had previously discouraged the use of RIVTs. Under this doctrine, a person who purported to create a trust in which he was the sole beneficiary and sole trustee, had actually created no trust, since the interests “merged.” New EPTL §7-1.1 abolishes the merger doctrine in the context of RIVTs. It provides that where the same person is both “the sole trustee and sole holder of the present beneficial interest, the trust is valid if one or more other persons holds a beneficial interest.”
Another problem with RIVTs was the lack of statutory guidance governing their execution. Execution of Wills has always been governed by strict statutory requirements, and Wills executed in the presence of an attorney are presumed to have been validly executed. The new law addresses this void, imposing requirements less rigorous than those governing the execution of Wills. RIVTs created prior to December 25, 1997 are governed by existing law, and, strictly speaking, need not be revised. Such revision, however, would likely be judicious in light of the new procedures, described below.
Under new EPTL §7-1.7(a), a RIVT must be (1) in writing; (2) signed by a grantor at least 18 years of age; and (3) acknowledged by a notary or signed in the presence of two witnesses. (Note: (i) acknowledgment must be in the manner required for the recording of a conveyance of real property; and (ii) although the statute is silent, it is probably best to have the RIVT acknowledged within 30 days.)
Under new EPTL §7-1.17(b), amendments or revocations of a RIVT must also be signed and witnessed or acknowledged in the manner identical to that required for their execution. (The creator can, however, provide in the trust instrument for different formalities of revocation or amendment.)
New EPTL §7-1.17(b) requires that all trustees be notified in writing of any amendment or revocation within a “reasonable” period of time. Although failure to provide such written notice will not void the amendment or revocation, no trustee who acts without having received such notice can be held liable for any actions taken. New EPTL §7-1.16 also provides that a subsequent Will may revoke a amend a RIVT. To accomplish this, however, the Will must specifically refer to the trust or trust provision in question. New EPTL §7-1.17(b) also provides that a trustee of a lifetime trust is protected from liability if assets are distributed in good faith without knowledge that the trust was revoked or amended by the testator’s Will.
Another previously uncharted area concerned transfer of assets into the RIVT. New EPTL §7-1.18 provides in general that a trust is valid “as to any assets therein to the extent the assets have been transferred to the trust.” Previously, a mere declaration by the grantor of an intent to transfer certain assets into the RIVT may have sufficed, without formal title or registration changes. Typically, this was accomplished by inserting a provision in the trust instrument assigning to the trustee “those assets listed in Schedule A annexed hereto.”
The new law requires more. New EPTL §7-1.18 provides that “[f]or purposes of this section … transfer is not accomplished by recital of assignment.” However, specific statutory guidance is provided only with respect to RIVTs in which the grantor is also the sole trustee. Here, effective transfers require that (i) titles of bank accounts be changed; (ii) stocks be reregistered; and (iii) real estate be transferred and the deed be recorded. Failure to adhere to these formalities will render the transfers ineffective.
If the grantor is not the sole trustee, the transfer would probably be deemed complete under the new statute provided the grantor delivers the assets to the trustee with the intent to make a transfer in trust. Nevertheless, adhering to the more stringent requirements appears to be preferable: reregistering the assets and transferring title to real estate while the grantor is alive are fairly simple tasks. After the grantor’s death, these tasks become procedurally more difficult and more time consuming.
What if the grantor dies having validly executed a RIVT, but before having legally transferred property into the trust? Disposition of those assets will not be governed by the RIVT, which property would instead pass by Will or intestacy. This problem can be avoided by drafting a Will containing dispositive provisions identical to those contained in the RIVT with respect to the property intended to be transferred to the RIVT. However, since a Will may amend an existing RIVT, it is best to execute the Will first in this situation.
It is not necessary to amend a preexisting Will after the property transfers have been made to the RIVT since a Will can only dispose of property within the probate estate. Property effectively transferred to a RIVT is no longer within the probate estate. Put another way, an ineffective devise does not affect the validity of a Will. Still, executing a codicil in this situation does no harm, and may well mollify the testator. (Thus, the proverbial devise of the Brooklyn Bridge to heirs is ineffective, but will not invalidate the Will — although it might raise questions of testamentary capacity.)
Some tangible property, such as a coin collection, cannot be registered. In this situation, an instrument of assignment must be prepared which describes the asset with particularity. Although trusts funded prior to December 25, 1997 will be governed by prior law, it is probably advisable to comply with the more rigorous funding requirements under the new law even with respect to previously executed RIVTs.
Another advantage of the RIVT is that a challenge based on mental competence, to be successful, would probably be required during the grantor’s lifetime, when he could still defend against such a challenge. Being a contract, courts may require a lower degree of mental capacity to execute a RIVT. In any event, a challenge to a RIVT based on mental capacity after the grantor’s death (which is when it would most likely come from frustrated heirs) would probably be viewed by a court with considerable skepticism, given the likely passage of time since the trust’s execution.
Another problem associated with RIVTs was posed by EPTL §10-10.1, which prohibits a trustee from making discretionary distributions to himself. This severely limited the utility of RIVTs, since the grantor and trustee of a RIVT were often the same person. To avoid this problem, RIVTs were required to name two trustees, one of whom could still make discretionary distributions to the grantor-trustee. The new law amends the above section to the extent that the bar against discretionary lifetime distributions does not apply if the trustee also has the power to revoke the trust. By definition, this condition is always met with RIVTs.