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).
Living Trusts are revocable and amendable. They are a substitute for a Will in the sense that the trust will control the distribution of the property held by the trust. The property titled in the name of the trust will not go through probate which is considered an advantage by many people. Living trusts can be very useful in disability situations, making it easier for loved ones to control the property. This use is often seen when parents are elderly and infirm, and they appoint one of their grown children to be co-trustees with them. This arrangement allows the grown child to assist the parents when they need it. It is convenient for both the parents and the grown child. To work, the trust must be appropriately funded. Accounts and real estate need to be transferred to the trust. Beneficiary designations need to be updated to work with the trust. Trust planning can be more comprehensive than Will planning. Trust-based planning may make estate tax planning work better. A trust can hold real property located in multiple states, avoiding multiple probates. Living trusts may provide better control and segregation of property in second marriage situations in the event of disability or death.
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 Pourover Will
It may seem contradictory, but even if you have a trust to avoid probate, the person still needs a Will. These Wills are called Pourover Wills because they generally have one major provision which says that if you find any probate property, then put it in the trust. Remember that the trust only controls property that is titled in the name of the trust, so if something is inadvertently left out of the trust, the Pourover Will puts it into the trust. When trusts are set up, people typically want to avoid probate, so they hope that the Will won’t be needed. However, estate planning is contingency planning, and a person could inadvertently leave property out of the trust, thus requiring a Will to get it back into the trust.
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.
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.
Other Estate Planning Documents
You have the Trust, but don’t forget that you also need, as mentioned above, a Pourover Will, Health Care Power, Living Will, and Durable Power of Attorney for Financial Affairs.
At The Law Office of Raymond E. Brown, LLC, we prepare the funding documents when clients create Living Trusts. This typically means that we prepare a deed to transfer their home to the trust. We also prepare letters to be approved by the client that will transfer accounts into the name of the trust. We update the beneficiary designations to make sure they fit with the estate plan.