What is a Living Trust?

As the name implies, a living trust is a trust created during the lifetime of the trustor. A living trust transfers legal ownership of property from a person into the guardianship of the trust during their lifetime. As you are the creator and contribute assets to the trust, you are the trustor, or grantor of your trust. You are also the trustee. (You could choose someone else to be the trustee, but why in the world would you do that?) You retain control of the trust, change it, or dissolve it when you choose. You also retain control of the items in the trust: assets, homes, personal property, investments, and businesses. It’s basically business as usual. We all want to feel like we have control over those things we’ve worked so hard to accrue. A living trust is a very popular investment strategy that is used in estate planning to protect your assets before and after death. When you pass on, the assets in the trust transfer to your beneficiaries as previously designated by the terms of the trust.

***Did you know? A living trust is also called an “inter vivos trust.”

A Will AND a Trust?

That’s right—these go hand in hand. Don’t be lazy now and just set up one or the other. You’ll regret it later. 

A will goes into effect after your death.

A trust goes into effect as soon as you create it.

With a will, your legal representative will follow the instructions of the will to make sure your directions are followed after you kick the bucket.

With a trust, property can be distributed before, at, or after death. 

A will covers only property in your name upon death. It will not cover anything held in joint tenancy or in a trust.

In a trust, property must be in the name of the trust (transferred into the trust) if it is to be covered by the trust.

In a will, you can name guardians of minors and choose funeral arrangements.

A trust can be used to provide tax savings and “in case of emergency” situations, like disability.

A will must pass through probate at the time of your death. (This means the court makes sure the will is legal and binding, and that the property gets distributed correctly.) A will is public record.

A trust does not pass through probate, which saves time and money. And it can remain private.

My To-Do List:

Help Wanted:

Find an attorney familiar with trusts, and involve your financial adviser. There will be a cost of time and money to set this up, but it will be well worth the initial investment to avoid later expense and heartache. It should only take a few weeks to set up your trust unless you have extremely complicated business structures or assets. Worth it!

Transfer of assets:

Some assets will need to have the name changed on the titles from your individual name to the name of the trust. Think investments, real estate, bank accounts, automobiles, etc. Some assets, such as life insurance and retirement plans pass to a designated beneficiary so they don’t need to be included. However, you may want to change the name of the beneficiary on some insurance policies to the trust so that the court doesn’t get involved if the beneficiary becomes disabled. 

Successor Trustee:

Hopefully, all will go smoothly with your life. But on the off chance you become incapacitated or move on to the next life, you’ll need to designate a successor trustee—someone to manage the trust in your absence. This can be anyone, from a spouse to a friend, a relative to your lawyer, or your child to a business partner. And you may want to have a backup to your second in case that trustee becomes unable to perform.

If the trust is set up this way, your successor trustee will continue to manage your assets in the trust, handling the finances and paying your expenses in case you become incapable of the responsibilities. Upon your (hopefully timely) demise, the successor trustee pays your debts, distributes your assets, and files your tax returns. The trust is liquidated quickly as there is no need for the courts to be involved.

The trust can continue after your death. The trustee distributes the assets as the trust dictates, but he can manage the remainder according to the terms of the trust. For example, you may have an heir that can’t receive their funds until they reach a certain age; or the trust can manage the care of a beneficiary with on-going special needs.

Don’t Forget Taxes:

A revocable living trust is not a tax haven. You will be accountable to pay taxes on your estate while you’re alive, and your heirs will be responsible after you pass on. You can set up your trust to allow both you and your spouse to claim estate tax exemption, which will save you a decent amount in estate taxes. If paying fewer taxes is your goal, you may want to took into irrevocable living trusts, bypass trusts, and charitable trusts.