What You Can't Do as Trustmaker of a Revocable Living Trust

When it comes to estate planning, a revocable living trust is a powerful tool. It allows for flexibility, privacy, and effective management of assets both while you’re alive and after you pass away. As a trustmaker (also known as a grantor or trustor), you create the trust and make important decisions regarding its contents, but you also take on specific responsibilities and limitations. In this guide, we’ll explore the key things you cannot do as a trustmaker of a revocable living trust.

What Is a Revocable Living Trust?

A revocable living trust is a legal arrangement in which you, as the trustmaker, transfer assets into a trust while retaining the ability to amend, revoke, or manage it during your lifetime. It allows you to control your assets while you’re alive, and upon your death, it ensures your assets are distributed according to your wishes without the need for probate.

In a typical revocable living trust, there are three key roles:

• Trustmaker (Grantor or Trustor): The individual who creates the trust and transfers assets into it.

• Trustee: The person or entity that manages the trust’s assets and carries out the trust’s instructions.

• Beneficiary: The person(s) or entity(ies) who will receive the assets from the trust.

While the trustmaker has significant control over the trust’s assets and instructions, there are certain limitations to this control. Let’s take a closer look at what you cannot do as the trustmaker of a revocable living trust.

Limitations of the Trustmaker While Alive

1. You Cannot Shield Assets from Creditors

One of the primary limitations of a revocable living trust is that it does not provide asset protection from creditors. Since the trust is revocable, meaning you can change or revoke it at any time, the assets in the trust are considered part of your estate for creditor purposes. This means that if you are facing legal action or financial obligations, creditors can access the assets in the trust to satisfy your debts.

To shield assets from creditors, you would need to consider other legal strategies such as an irrevocable trust or asset protection planning.

2. You Cannot Avoid Paying Taxes on Trust Income

While a revocable living trust allows your assets to bypass the probate process after your death, it doesn’t provide any tax advantages during your lifetime. The income generated by the trust’s assets is still considered your personal income and must be reported on your individual tax return. In other words, you are required to pay income tax on any earnings the trust generates, and those earnings are subject to your personal income tax rate.

This is an important consideration if you plan to transfer income-producing assets into the trust. You won’t be able to defer or avoid paying taxes on that income simply by placing it in a revocable living trust.

3. You Cannot Act Outside of the Trust’s Terms

Although you retain control over the assets in the trust, you cannot act in a way that violates the trust’s terms. For example, if the trust specifies certain instructions for how assets should be managed, invested, or distributed, you must comply with those instructions.

If you decide to make changes to the trust or take actions that contradict its terms, those changes could potentially be challenged in court, especially after your death when the successor trustee takes over. It’s crucial to work with an estate planning attorney to ensure the trust’s terms are clear and reflect your intentions.

4. You Cannot Use the Trust to Take Personal Disbursements

Even though you are the trustee of your own trust and have the power to manage its assets, any withdrawals or disbursements from the trust must be handled properly. You cannot simply take assets from the trust for personal use without following the trust's rules. When acting as the trustee, you must always sign documents in the capacity of "trustee" rather than as an individual.

For example, if you want to make a withdrawal or transfer, you must sign as “John Doe, Trustee of the John Doe Trust” instead of just “John Doe.” This ensures that the trust is not treated as a personal account but is instead handled in accordance with the trust's terms.

5. You Cannot Avoid Estate Tax Responsibility (While Alive)

As the trustmaker, even though the trust is revocable, the assets in the trust are still part of your taxable estate during your lifetime. Therefore, you cannot use the revocable living trust to avoid estate taxes while you are alive.

After your death, however, the assets in the trust may avoid the probate process, but they will still be subject to estate taxes, depending on the total value of your estate. While the trust helps to avoid probate, it does not eliminate the possibility of estate taxes on assets that pass through the trust.

6. You Cannot Transfer Assets to Someone Without Incurring Gift Tax

While you may freely move assets in and out of your revocable living trust, these transfers are considered gifts for tax purposes if the assets are being transferred to someone else, such as a family member or beneficiary. If you transfer significant assets to others, gift tax may apply, depending on the value of the gifts and the annual gift tax exclusion.

For large gifts, exceeding the exclusion limits, you would need to file a gift tax return. In addition, if you continue to use the assets in the trust for your own benefit, the IRS may not treat the transfer as a gift at all.

Limitations of the Trustmaker After Incapacity or Death

The role of the trustmaker does not end at incapacity or death. In fact, it transitions to the successor trustee once you are no longer able to manage the trust or after you pass away. There are some limitations that apply during this time:

1. You Cannot Be the Trustee After Incapacity

If you become incapacitated and unable to manage your affairs, you can no longer serve as the trustee. At that point, the successor trustee, whom you have designated in the trust, takes over the management of the trust’s assets. The successor trustee will manage the assets in accordance with your instructions and will be responsible for distributing the assets to your beneficiaries when the time comes.

However, even in this situation, you retain the rights of a beneficiary if the trust allows you to receive benefits from the trust during your lifetime.

2. You Cannot Control the Trust After Death

Once you pass away, you no longer have any control over the trust. The successor trustee will be responsible for administering the trust, making sure that the trust's assets are distributed according to your wishes, and paying any outstanding debts or taxes. The instructions you have laid out in the trust document will be followed, but you will not have the ability to make changes or intervene.

Understand Your Rights

As the trustmaker of a revocable living trust, you have significant control over the assets within the trust during your lifetime. However, it is important to understand your limitations and the rules governing what you can and cannot do, both while you are alive and after you pass away or become incapacitated. While the revocable living trust provides a great deal of flexibility, it is not a tool for asset protection, tax avoidance, or circumventing the law.

To ensure that your estate planning is effective and legally sound, it’s essential to work with an experienced estate planning attorney who can help guide you through the process and help you avoid mistakes. By understanding the limitations of a revocable living trust, you can create an estate plan that meets your goals and ensures your assets are managed and distributed according to your wishes.

If you have any questions or need help setting up a trust, please contact us today to schedule an appointment with one of our estate planning attorneys. We are here to help you navigate your estate planning needs and create a plan that works for you and your loved ones.