What You Should Know about Living Trusts

Glossary:

• Trustor: The trustor establishes the terms of the trust, including how the trust is to provide for the beneficiary.
• Trustee: The trustees are the legal owners of the trust, but they are obliged to hold the property for the beneficiary.
• Beneficiary: The beneficiary can be individuals or organizations who receive benefits from the trust.

What is a Trust?  A trust is a legal entity in which money or property is owned and managed on behalf of another.  A trust has one or more trustors (or “trustmakers”), trustees and beneficiaries.  The trustor establishes the terms of the trust, including how the trust is to provide for the beneficiary.  The trustor also names the trustee whose duty is to follow the terms of the trust and manage the trust for the benefit of the beneficiary.  The trustor, trustee and beneficiary need not always be different persons, depending on the purpose of the trust.


What is a “Living” Trust?  A living trust is one which becomes effective while the trustor is still alive.  There are a variety of livings trusts, the most common of which is a revocable trust for estate planning.  This type of trust typically names the same person as trustor, trustee and beneficiary so long as he lives.  Then at the trustor’s death, whoever the trustor named as successor trustee becomes the new trustee (like an executor is to a will).  At that point, the trust assets are often distributed to the new beneficiaries.


Establishing and Funding a Trust.  A trust can be placed into service very quickly and inexpensively, but it is important to have an experienced professional do it in order to make sure it properly addresses personal circumstances as well as tax, distribution and other planning objectives.  Just as importantly, it is imperative to coordinate the trust with other aspects of your estate plan.  Of greatest importance is the funding of the trust.  The trust only controls assets which are funded to the trust by ownership title, beneficiary designation or other similar means.  Failure to properly fund can result in an ineffective trust.  After the trust is set up and coordinated with the rest of the estate, it requires little or no further maintenance.


Maintain Control.  No control is given up as a result of establishing a trust.  Property can be bought and sold or used without restriction.  Until the trustor dies, the IRS treats the trust as a “grantor trust” so that it is ignored for tax purposes.  When the trustor dies, the trust is no longer a grantor trust and it must file a tax return using its own tax identification number.


Revocable.  A trust is different than a will as explained above, yet it is also similar to a will in that it can be amended or revoked prior to death.  Once the maker of the trust dies, it cannot be changed.  It also names beneficiaries like a will.


Avoid Conservatorship.  Just as the trust allows for the avoidance of  probate, when a judge clarifies and makes decisions about the wishes of the deceased (see below), it likewise allows for the avoidance of a conservatorship prior to death.  A conservatorship is similar to a probate, except probate deals with the estate of a deceased person while a conservatorship deals with the estate of a living (but incapacitated) person’s estate.  Conservatorships and probates are usually conducted in the same courtroom and are similarly cumbersome and unpleasant.


Minimize Estate (a.k.a. “Death”) Taxes. For married couples, a living trust provides a means in which both spouse’s federal estate tax exemption equivalent amounts can be used, instead of using only one spouse’s exemption.  For larger estates, this can result in hundreds of thousands of dollars in savings to the beneficiaries of the estate.


Asset Protection/Beneficiary Protection.  Additional processes can be implemented through a trust in order to protect the assets from current creditors as well the future  creditors of the intended beneficiaries.  The trust can also be drafted to “incentivize” beneficiaries to do some things and to not do others things.  Finally, the trust can control how funds are used for beneficiaries who are young, have special needs or have other circumstances such that outright distributions might not be in their best interest.
 

Probate Avoidance.  Unlike wills, trusts are generally not subject to probate.  This is because it is presumed that a person who establishes a trust has confidence in, or trusts, the person whom they have named as trustee to handle the estate privately and without the supervision and accountability of a judge. Because it is handled privately, the estate is spared of the time, cost and publicity of formal probate procedure.  This can be a difference of several thousands of dollars and months or years of frustration.


Summary.  By its very nature, a trust is extremely flexible and is usually the best device available to accomplish a variety of estate planning objectives, from the relatively simple to the very complex.  Though a trust will be appropriate for the vast majority of estates, it is not a one-size-fits-all apparatus.  Likewise, even though a trust will be a core part of most estate plans, it is not a substitute for health care directives, power of attorneys, pour-over wills and a variety of other estate planning documents which supplement the trust. Thus it is important to meet with an experienced professional to construct your trust and coordinate it as part of your comprehensive estate plan.