First, what is a “living” Trust? Also called an “inter vivos” Trust, a Living Trust is created by the grantor during the grantor’s lifetime, rather than upon their death.
All of the terms of a Trust are set out in the trust document itself. This usually takes the form of a deed, called a “Declaration of Trust,” and is governed by local law, so be sure to consult the laws of your own state. The trustee has the legal obligation to administer the Trust according to the terms of the Trust and in compliance with local law. If the trustee does not manage the trust properly, he or she can be held personally liable for specific issues that arise. For example, where the trustee does not correctly invest in expanding the trust fund, many courts have found that trustee responsible for the lost income.
Benefits of a Living Trust
Living Trusts are designed to avoid probate proceedings. Probate simply refers to the court-administered process of paying debts and distributing property to heirs upon one’s death. This is a very timely and costly process. Heirs can often expect to wait months before receiving anything, and by the time they do, the assets have been diminished significantly by court costs and attorney’s fees. Other common reasons to create a living trust include: 1) reducing taxes; 2) ensuring financial privacy; and 3) regulating the use of assets (in case the owner becomes incapacitated).
Moreover, all documents that go through probate, including Wills, become public record. But since Living Trusts don’t go through probate, they never become a matter of public record. Probate is the process that courts use when a property owner has not designated who the property should go to after her death. All of the property transferred according to the Living Trust avoids probate, however. Upon the grantor’s death, the trustee transfers ownership of the property to the beneficiary, as designated in the trust document. This usually only takes a few weeks, compared to probate which can take months. In addition, there are no lawyer’s fees or court costs to pay for settling a trust, so it saves money. Once ownership of all of the property in the Trust fund has been transferred to the beneficiary per the terms of the Trust document, the Trust ceases to exist.
Maintenance Requirements of a Living Trust
There is quite a bit of paperwork involved. After the initial creation of the Declaration of Trust, the grantor must create and sign new deeds each time she adds an asset to the Trust. For example, if the grantor decides to leave her own house to a beneficiary in the Trust, the grantor must sign a deed, specifying that she owns the house as trustee of her Living Trust. This paperwork may seem burdensome; however, the process is much more efficient today because living trusts have grown to be so common.
The Importance of Also Having a Last Will and Testament
A Will often contains a clause that names the recipient of all property not specifically left to a beneficiary. For example, if someone obtains ownership of a car shortly before death, and does not include the car in his Last Will and Testament, that person may not have had the title of the car transferred to his Trust, either. If he did not have a Will, that car would fall to probate. However, if he had a Will containing the above-mentioned clause, the car would go to the recipient named in the Will.
Some jurisdictions recognize what is called a “Pour-Over Will.” This is a type of decree that orders all of the grantor’s property to “pour” into her Trust, at the Time Of her Death. That way, all of her assets would be distributed to the beneficiaries named in the Trust, and none of her assets would fall into probate. Not all states recognize this; so, be sure to check your state’s laws.
Without a Last Will and Testament, any property that is not transferred by a Living Trust will be distributed to the closest relatives. This distribution will be determined by the courts according to state law. Each state has devised distribution laws, according to how a reasonable person would want their assets distributed. Even so, courts may not distribute your property the way you would want. It is best to create a Will to specify how you want your property distributed after your death.
Living Trust and Estate Taxes
Some Living Wills can lower your estate taxes. A simple Living Trust does not affect taxes, but more complicated Living Trusts — which include numerous valuable assets — can substantially reduce estate taxes. An AB Trust (also referred to as “marital bypass trust”) is designed specifically for married couples with children. Each spouse leaves the other spouse property in Trust, for life, and then to the children. For example, if Husband and Wife create an AB Trust, and Husband dies, Wife receives all of the property of the Trust. Then, when Wife dies, her interest in all of that property passes to their children. This AB Trust can potentially save up to hundreds of thousands of dollars in estate taxes.