- Reduce or eliminate estate taxes
- Avoid probate
- Make things easier for your beneficiaries
- Keep your estate private
- Maintain complete control
- Provide for minor children or grandchildren
- Reduce the hassles for your spouse
- Establish guardianship for minor children
- Protect yourself in case you are incapacitated
What's a Living Trust?
A Living Trust, also known as a Revocable Living Trust or a Family Trust is a legal document that holds title or ownership to your real property and assets. When you create a Revocable Living Trust you transfer ownership of your assets to the trust. Transferring assets is typically called "funding." When you transfer title you DO NOT relinquish any control. You can still buy, sell, borrow or transfer.
To many the Living Trust looks a lot like a will. It includes the details and instructions for how you want your estate to be handled at your death. However, unlike a will a properly funded trust:
- Does not go through probate.
- Prevents the courts from controlling your assets at incapacity.
- Gives you control over the assets you leave to your minor children or grandchildren.
Will I Lose Control of my Assets?
No! The Living Trust is a written legal document that allows you, as the trustee(s) unlimited access to and full control of your assets during your lifetime. It also enables you to pass property after your death to family, friends, and/or loved one. It allows you to appoint someone (a successor trustee) to make certain your property goes to the ones you choose after your death.
I Thought a Will Avoids Probate?
Many individuals are under the impression that their will alone is sufficient to avoid probate. Unfortunately, a will is simply an expression of your wishes and must go through some kind of court process before the assets can be distributed to the heirs.
The reason for probate is needed because the owner of the property or asset is deceased. Once the owner of the asset has died, probate court is the legal process needed to take their name off the title of an asset and put it in the new owner's name.
Will Joint Tenancy Avoid Probate?
Putting your children's name on your property does not avoid probate, rather it only puts it off for a few more years.
How Does a Living Trust Work?
For a trust to be effective it has to own title to the property or asset. Remember, when you transfer title of your assets into the trust it is called "Funding your Trust." Funding is the process of transferring the name on accounts or property to the name of the trust. For example, accounts in the name of "Bill and Mary Stevens, Trustees of the Stevens Family Trust dated date signed and year."
When the assets are in the name of the trust there is no need for probate since the estate is now controlled by the trustee of the trust. You or your spouse can be the primary trustees receiving full control to buy, sell, borrow or transfer in the case of a spouse's death. After both spouses pass, the trust identifies the person who will act as successor trustee. The trust gives that person the right to manage all assets on behalf of your wishes made known in the trust document. Remember, you and your spouse will decide who will manage all affairs.
Who's Involved in my Living Trust?
To better understand the trust, we thought it would be important to explain the different roles of the people who would be involved.
Grantor:
This is the person who sets up the trust. This would be you. The grantor has many names such as the creator, settlor, or trustor. As the grantor, you have full control to manage or change the trust at any time.
Trustee:
The trustee is the person who will manage the assets in the trust. Again, this will most likely be you while you are alive. When a trust is created, the trustees are usually the same individuals as the grantor. For married couples, usually the husband and the wife both act as co-trustees. You do not have to be your own trustee if you do not want to or do not feel you are able to. You can name a child or friend or even an institution to manage your affairs for you while you are alive.
Successor Trustee:
This is the person who will manage your assets for you when you die or if you should become incapacitated. This person or persons will have the right to manage your affairs without the need for any probate court. The successor trustee will immediately have the same powers that you as grantor/trustee had to buy, sell, borrow, or transfer the assets inside the trust. More importantly, the successor trustee has the right to distribute the trust's assets according to your instructions in the trust. This immediate control can allow your estate to be transferred to your children or loved ones right away avoiding the time delay of probate which can usually consume anywhere from six months to two years.
Fortunately for you and for the protection of your heirs, the successor trustee does not have the legal right to change your trust. The trust becomes irrevocable or unchangeable after the death of the grantor(s). However, the successor trustee does have the right to manage the assets in the estate, but must do so for the benefit of the beneficiaries. You can choose one or two or more people working together as a successor trustee.
Beneficiaries:
The people who will receive the benefit of the trust's assets are called the beneficiaries. Typically the estate will go to the surviving spouse. If there is no surviving spouse, assets will pass to the people you named in your trust. You are not limited to who you want to receive your estate. You can name your children, relatives, friends, or a charitable organization to be your beneficiary.
What Happens When I Die?
After you pass away, your successor trustee or co-trustee will have the same responsibilities an executor would have if you would have prepared a will. However, since your trustee does not have to report to a probate court everything can be done more efficiently and privately.
Other Advantages to Using a Revocable Living Trust.
- If an illness or accident leaves you incapacitated, your successor trustee can handle your financial affairs without the need for a court appointed guardian or conservator.
- If the beneficiaries of your trust are minor children or others who might not use an inheritance as you intend, the trust can continue to hold the assets until they reach a more mature age.
- If you own real property in more than one state you avoid the expense, time and hassle of multiple probate proceedings.
- Trusts are generally more difficult to contest than a traditional will. To invalidate a will you must either prove it was signed under duress or that the maker was incompetent on the day it was signed. To invalidate a Living Trust you would have to prove it was invalid not only on the day it was signed but each and every day it was in existence thereafter.
- It is almost impossible to contest a Living Trust. When a will is contested, the assets are frozen and they cannot be distributed until the claim is resolved. Assets placed in a Living Trust are not frozen pending the outcome of a legal challenge. Anyone wishing to contest the trust must file suit against each of the beneficiaries; in the meantime the assets in the trust can be distributed.
Living Trust Questions
Over the past few years the Revocable Living Trust has received a lot of press. As more and more people become aware of downside to probate, talks begin about alternatives especially the Living Trust. Unfortunately, a lot of misinformation is also communicated. So, to remedy this, we did our best to compile many of the most common questions we received and answered them for you.
Common Questions & Answers About the Living Trust
Q: What exactly is a Revocable Living Trust?
It is a separate legal entity set up to care for and manage property or funds for you or for the benefit of another.
Q: Will a Living Trust protect my estate if I have to go to a nursing home?
No. Many people think that putting their assets into a Revocable Living Trust would help them qualify for Medicaid, because the assets would no longer be titled in their name. Because a Living Trust is revocable and under your complete control, you have not "given anything away." An alternative to Medicaid is long-term care insurance, which one would create to pay for the costs of long term care.
Q: If I set up a trust is a will also required?
Yes. A will, called a "pour over" will, is also drafted in conjunction with your trust. If you fail to transfer all your assets into the trust, the will picks up those assets at the time of your death and transfers them into your trust for distribution. All assets "poured into" your trust by the will must go through the probate process first. Guardians for minor children are also named in the will.
Q: Will my property taxes increase if I transfer my real estate into a trust?
No. State law stipulates a special exemption for property placed into a trust for the benefit of the Grantor.
Q: Does my tax status change when I create a Revocable Living Trust?
No. As long as you are the trustee of your trust, any income generated by assets owned in your Living Trust are taxed as if they were still held in your name and reported on your personal 1040 form. No special taxpayer identification number and no special tax forms are required.
Q: Can I borrow against the assets in the trust?
Yes. The trust does not restrict your rights to borrow on assets in any way.
Q: What rights does the surviving spouse have in the trusts assets?
If the surviving spouse is a trustee, he/she has unlimited rights to buy, sell and transfer assets.
Q: Doesn't joint tenancy always avoid probate?
No. Joint tenancy does not avoid probate upon the death of the last owner. For instance, if you and your spouse own your house as joint tenants and you die, the house passes to your spouse free of probate. However, when your spouse dies, or if you and your spouse die simultaneously, the property will be subject to probate because there is no surviving joint tenant. Had the house been placed in the Living Trust, there would not be probate at either death.
Q: Who manages the trust?
Usually you name yourself to be the manager (trustee). However, you could name a friend, a child who is not a minor, or a corporate entity, such as a bank.
Q: Are Living Trusts valid in all 50 states?
Yes. A Living Trust is valid in all states and in most foreign countries.
Q: Will I have to rewrite my trust if my personal circumstances change?
You can change or amend your trust as often as you wish. We suggest, after two or three changes, you make an "amendment in entirety" incorporating all of your changes into one document.
Q: How does the trust end?
A Living Trust is dissolved when all of the assets have been distributed or it may be revoked by the Grantor(s) at any time.
Q: Will a Living Trust protect me against my creditors?
No. A Living Trust does not insulate your assets from the legitimate claims of creditors.
Q: Can I appoint a minor child as a Successor Trustee?
No. The minimum age for a Successor Trustee is eighteen years.
Q: What is the difference between a "revocable" and
"irrevocable" trust?
A revocable trust can be changed at any time until a designated event occurs, usually one's death. An irrevocable trust cannot be changed once it has been created.
Q: Can the Living Trust buy new assets without making an amendment to the trust?
Yes. Title to any assets purchased after the execution of your trust should be purchased after the execution of yoiur trust should be purchased in the name of trust.
Q: Can a Living Trust save on income taxes?
No. A Living Trust provides no income tax advantages.
Q: What is an A-B Trust?
An A-B Trust is one version of a Living Trust that can be used by married couples to utilize the $675,000 exemption for each spouse and thereby minimize or eliminate estate taxes. This option is included in all Legacy Documents.