Estate Planning - Fundamentals of Trusts and Living Trusts

What They Are and When You Need Them




A Trust is a right in property, both real and personal. It is a legal relationship in which one person or qualified trust company holds property for the benefit of himself/herself or of another.

Trusts are formed by the owners of the assets who may continue adding to their Trust. Many trusts are created as an alternative to, or in conjunction with, a Will and other elements of Estate Planning.

A Living Trust (Inter Vivos Trust) is established while you are alive. A Trust can be revocable, (subject to change or termination) or irrevocable, (difficult to change or terminate). Most Living Trusts are revocable.

A Testamentary Trust exists on paper while you are alive, and is activated after your death. Because of this, it is always irrevocable after your death. However, while you are alive, you can revoke or change this type of Trust. Copyright HG.org

Fundamentals of Trusts

Living Trusts are one of the most common estate planning tools in use today. Anyone with an estate of $100,000 or more can benefit from the establishment of a Living Trust.

Although not as common, Testamentary Trusts are helpful for parents who want to provide for their young children but don’t want them to receive their inheritance in a lump sum. They are also useful for people with large estates who want to lessen estate taxes and protect their assets from creditors.

Parties Involved

There are generally four different parties named in a Living Trust document.
  • Trustor (Grantor, Settler, Donor) – the individual or couple that establishes the Trust.
  • Trustee – the person named by the Trust as the controller of the Trust’s assets; responsible for managing the property that is titled in the name of the Trust. Often, the Grantor names him/herself as the Trustee.
  • Beneficiary – an heir that will receive the property held in Trust once the Grantor has died.
  • Successor Trustee - If the Grantor has named him/herself as the Trustee, the Successor Trustee is responsible for taking care of the estate assets and distributing them to named Beneficiaries after the Grantor's death. A Successor Trustee is also often named in case the first choice for Trustee cannot fulfill his/her duties for some reason.

Living Trust Advantages

A Trust is recognized as a separate legal entity, so distributions can be made by a Trustee to named Beneficiaries without any involvement from the courts. Therefore, a Living Trust allows your family members to transfer the property that you want them to have after you pass, quickly and easily, without going through probate. This also avoids probate fees, which results in a larger inheritance for your Beneficiaries.

In addition, unlike a Will, the terms of a Living Trust usually need not be made public. Although it is easy to investigate who has inherited real estate, since real estate ownership is a matter of public record, it is not as simple to determine who has inherited other property, since the Trust document is not made public. This makes it more difficult for creditors seeking debt repayment from the deceased’s estate.

Because a Trust is controlled by a Trustee, that person can carry out your wishes when you are not able to. If you are institutionalized or unable to care for yourself anymore, the Trust can still function and make distributions as required.

Creating a Basic Revocable Living Trust

To create a Basic Revocable Living Trust, you start by creating a “Declaration of Trust” which is similar to a Will. In this Declaration you name the people and/or organizations you want to leave your Trust property to after your death. Since this is a Revocable Trust, you can change these Beneficiaries at any time, as well as revoke the Trust if you choose.

For a Basic Trust, you would name yourself as the Trustee. If you are married, you and your spouse can create the Trust together and name yourselves as Co-Trustees.

Decide on the property that you want to bequeath after your death. You then fund the Trust by transferring ownership of this property to yourself, as Trustee. Almost any property can be placed in a Trust: savings accounts; stocks; bonds; real estate; life insurance; and personal property. You will maintain control of the property in Trust since you have established yourself as the Trustee.

There is critical paperwork that must be completed when forming a Living Trust. For example, when including your house in your Trust you must sign a new deed reflecting that you own the house as a Trustee of the Living Trust, rather than as an individual. If you are not going to have your Trust created by an attorney, it is advisable to obtain software and/or books that can explain these specifics.

You will also name a Successor Trustee in your Declaration. This is the person who will take over the trust after you die and transfer ownership of the trust property to the Beneficiaries you have named. Your Successor Trustee can usually complete this within a few weeks with minimal paperwork and no probate court proceedings.

It’s a good idea to make a back-up Will, even when creating a Living Trust. Sometimes property acquired after you have created the Living Trust fails to be transferred to the Trust, usually by simple oversight. In a Will you can include a clause that names someone to receive all of the property that you haven’t identified and left to a specific Beneficiary. This will ensure that any property not transferred to the Trust will still go to whomever you want to receive it. Without this backup, any of your property that hasn’t been transferred to the Trust will go to your relatives as determined by your state’s intestacy laws.

Creating a Basic Living Trust is usually no more time consuming or complicated than making a Basic Will. However, if your financial and estate issues are in any manner complex, or if you have questions and concerns, it is advisable to consult an experienced estate planning attorney.

How Wills and Trusts Compare

Although both Wills and Trusts determine how you can bequeath your property after your death to your Beneficiaries, they have many differences and serve diverse purposes.

A Will is a legal document that describes your instructions and intentions for how your assets and property are to be allocated after your death. This document must be written, signed and witnessed as dictated by state law. It identifies your individual possessions and names the people to whom you choose to leave them; names an Executor to manage the distribution of your assets; and if necessary, appoints a guardian to raise your children after your demise. After you die, a Will often goes through probate. This process can take several months.

A Trust is a legal relationship in which a Trustee holds property for the benefit of him/herself or of a Beneficiary. It is a form of ownership that holds the assets you have chosen for your benefit. If you have named yourself as the Trustee, after you die, the Trust is passed on to a Successor Trustee who you have originally named in your Trust. Otherwise, the original Trustee is responsible for managing and distributing your Trust assets after your death. Unlike a Will, with a Living Trust, the property held in trust does not go through probate after you pass.

Living Trusts are separate from your Will and are often used in place of a Will to avoid probate. Living Trusts can be revocable or irrevocable, although the former are the more common. A Testamentary Trust, however, is actually connected to your Will and does not avoid probate. This type of Trust is not activated until after your death. After the assets that you have identified for the Trust go through probate they are held in the Trust for your Beneficiaries. You can revoke or change a Testamentary Trust while you are alive. However, after your death, naturally, it is irrevocable.

Miscellaneous

A Living Trust does not protect property from creditors, before or after your death. While alive, the creditor can legally go after the Trust property the same way he would if it were not held in a Trust. After your death, your estate is subject to your lawful debts. This includes assets held in a trust.

If you are the Trustee of your Trust, the IRS requires you to report any trust income on your personal federal income tax return.

Find a Local Lawyer