The inter vivos trust is more flexible than other devices commonly used in planning for mental or physical incapacity, although its use is not limited to these situations. The trustor may be the trustee and simultaneously a beneficiary. The trustor can provide for a successor trustee to serve on his or her death or incapacity or whenever he or she decides to cease acting as trustee. Alternatively, the trustor may name the spouse, adult child, attorney, accountant, or corporate fiduciary as trustee or joint trustee and retain complete power to manage the trust or to direct the trustee until he or she becomes incapacitated or otherwise declines to act. Further, a trust can provide adequately and flexibly for the care of not only the trustor or trustors, but also their children and grandchildren, even while the trustors are living.
One disadvantage of a trust is that an individual’s ability to create or revoke a trust requires that he or she have the capacity to enter into contracts. Therefore, a trust ordinarily cannot be created to meet the needs of an incapacitated trustor, nor may an existing trust be modified or revoked unless the trust agreement specifically allows that action when necessary or advisable for a person who lacks the capacity.
The cost of administration if a paid trustee is used is still a disadvantage. A trustee’s fees are higher than expenses of the informal devices discussed earlier and may be incurred much earlier than fees in a court-supervised guardianship or conservatorship. Fees can be minimized in various ways. For example, all initial trustee fees may be avoided if a member of the family acts as trustee or if the trustor acts as his or her own trustee and is later succeeded by a family member.
Although creating a revocable trust is not a gift and there is thus no gift tax liability, taxable gifts result from creating an irrevocable trust for any part of the property no longer under the donor’s dominion and control, e.g., a remainder interest vested in a third party. The trust corpus may also be includable in the donor’s estate, for example, if he or she has retained a life estate in it or, as trustee, has the right to determine who receives the income.