In recent years, living trusts have grown increasingly popular as substitutes for wills in estate planning. They are sometimes
called revocable trusts or inter-vivos trusts. Living trusts can have several advantages over wills, including maintaining
or avoiding probate, avoiding guardianship, maintaining liquidity, and preserving privacy. You can create a living trust with
a trust document (also called a "Declaration of Trust") and change it at any time. You can transfer some or all of your assets to the trust but continue to use and
manage them during your lifetime. After you die, your trustee will transfer ownership of the assets to the beneficiaries named
in the trust.
An important benefit of living trusts is the speed with which your property can be transferred to
your heirs after your death. In addition, a living trust is private. Only you, your trustee, and your beneficiaries will know
the value of the trust property, how it is to be distributed, and the names of your beneficiaries. This article reviews the
basics of how to create and use a living trust. Your lawyer can help you decide whether a living trust is appropriate in your
circumstances and prepare a trust document that meets your goals.
BENEFITS AND GOALS OF A LIVING TRUST
Most people understand the importance of a will, but many are not familiar with trusts. Both a will and a trust can be used
to transfer your property when you die, but the similarity ends there. A will has no effect until you die, while a living
trust becomes operative during your lifetime to manage your assets. While a will is part of the public record, a trust is
not, thus providing greater privacy. Trusts are usually easier to amend than wills and less likely to be contested by your
As we discussed in the previous article, a will is a "blueprint"
for the Probate Court, and must be "probated" following
the will-creator’s decease. With a trust on the other hand,
after your passing, your trustee distributes trust property privately, according to your instructions, without the trust having
to be probated. This is a key advantage to a living trust.
You can use a living trust to make decisions about
your old age care. The trust can specify your preference for care by your family or in a nursing home. If you become disabled
or incompetent, your trust controls who will care for you and how your money will be managed. Without a living trust, a court
might need to appoint a guardian if you become incapacitated. As with probate, guardianship proceedings can be costly and
time consuming. A living trust provides a way to avoid legal proceedings to appoint a guardian. A living trust may also help
you in a variety of other circumstances. For example, you can use a management feature of living trusts to appoint a professional
trustee for the elderly, for the inexperienced persons who have recently inherited wealth, and for minors. If you own real
estate in more than one state a living trust can help avoid probate in each state. Probate in multiple states increases the
cost and time to distribute your property to your heirs.
CREATING A LIVING TRUST
Your lawyer can
prepare a living trust agreement that appoints a trustee to manage your property for your beneficiaries. To maintain control,
you can be your own trustee. Commonly, the person creating the living trust is the first beneficiary while other provisions
transfer the property to their heirs upon death. The trust agreement will provide details on your rights to change the trust,
the duties of the trustee, how to distribute your property, how to provide for your family, and when and how to select a successor
You can cancel or change any of the provisions of your trust document, including the beneficiaries, the
property they are to receive, and the trustee. You should review your trust every year to assure that it still meets your
needs. Your lawyer can advise you about the legal and tax effects of your proposed changes and prepare a document that will
accomplish those changes.
CHOOSING A TRUSTEE
As noted above,
you can serve as your own trustee or you can appoint a professional trustee such as a bank or trust company. Most people appoint
an individual such as their spouse, a relative, a friend, or other advisor to serve as the successor trustee, who will assume
the role of trustee in the event of the trust-creator’s incapacity or decease. When deciding whom to select as trustees, you
should consider whether they are worthy of your confidence and are willing to accept the job.
A professional trustee
may be the best choice if your property will be difficult to manage or distribute. Or a professional may serve as co-trustee,
along with a family member or trusted friend. The disadvantages of professional trustees are that they are more impersonal
than a friend or family member, and they generally charge fees which can be costly. The choice of trustee is an important
one, with which your attorney can assist you.
The trust document will describe the duties of the trustee to manage
the trust property, keep records, prepare tax returns, and make distributions to beneficiaries. The trust document can also
designate a successor trustee or provide instructions on how to select the successor.
TRANSFERRING PROPERTY TO
After creating your trust, you must complete the formality of transferring your property to the trust.
This is called "funding" the trust. Property which you wish to have in the trust – and which you want to be subject to the
trust’s control – must legally be transferred into the trust. Accounts, stocks and bonds, and insurance policies can be re-titled
or transferred, and beneficiaries re-assigned, all into the trust. Deeds transferring your real estate should be prepared
and recorded in every county where you own real estate.
Although your living trust
can help you to avoid probate for some of your property, you may still need a simple will to go along with your trust. It
may be inconvenient to transfer certain property, such as your car or personal checking account to a trust. A will is also
needed for assets that you acquire after the creation of the trust or may have simply neglected to transfer to your trust,
such as furniture, clothing and jewelry. Usually, a simple will is executed along with the trust, known as a "pour over" will.
The "pour-over" provision transfers your property to the trust when you die. Such a "pour-over" provision will cause your
property to be distributed according to the terms of your trust. Finally, if you have minor children, you can use your living
trust to appoint a trustee to manage and hold your children’s inheritance until they come of age; however, a will is needed
for the specific purpose of appointing a legal Guardian to have personal care and custody of your children. This may or may
not be the same person as the trustee of your children’s inheritance – that choice is up to you. Once again, this is a choice
with which your lawyer can assist you.
purposes, the trust property in a revocable living trust is treated as if you remained the owner. You will report income from
the trust on your federal income tax return until your death. However, the creation and funding of a living trust does not
have any federal gift tax consequences.
In addition to helping you avoid probate, a living trust can also be structured
in such a way as to avoid or minimize federal estate taxes, which were discussed in the previous article on "What You Need
to Know About a Will." You lawyer
can help you to design a trust that provides the most favorable tax treatment for you and your heirs.
WORKING WITH YOUR LAWYER TO CREATE A LIVING TRUST
have many advantages in estate planning. Unlike wills, living trusts do not require lengthy and costly probate proceedings.
Your property and heirs will not be listed in public records in a courthouse. And your property can be transferred to your
heirs almost immediately after your death.. Ask your lawyer whether a living trust is the right estate planning tool for you.
Your lawyer can carefully draft a trust document to meet your needs and objectives and help you to reduce taxes for yourself
and your heirs.
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PLEASE NOTE: This article provides
general information. Laws develop over time and differ from state to state. This article does not provide legal advice about
specific legal problems. Most of all, this article is NOT a substitute for legal advice. Rather, it is intended to whet your
appetite for this topic, and give you some basic information. For more information about your particular situation, you should
seek out the advice of an attorney. Please give Attorney Rutter a call at any time, to schedule an appointment to begin a
discussion of YOUR estate planning needs!