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LIVING
TRUSTS
 Living trusts are trusts
created while you are alive. There are trusts called
"testamentary" trusts which are created upon your death in your
Will. One of the advantages of the Living Trust is that it will avoid
Probate and create a testamentary trust without court supervision. While a
testamentary trust created in a Will, will not. However, if a living trust
is not properly funded, maintained and administered, the trust may be
useless.
The most common type
of living trust is the revocable living trust which can be amended, or
revoked while you are alive. By contrast, an irrevocable trust cannot be
amended or terminated once it has been created.
The person who
creates the living trust is called the "settlor." The person who
is legally entitled to manage the trust property is called the
"trustee." The person for whom the trust was created is called
the "beneficiary". The settlor, trustee and beneficiary can be
the same person(s), or they can be different people.
A living trust may be
created by an individual or multiple persons, such as couples.
Revocable trusts are
very useful in such states as California where Probate is a burdensome
and costly process. By creating and implementing a living trust you can
avoid Probate. At death, the trust assets are distributed according to your
instructions in the trust by the successor trustee named in the trust
instrument without court involvement. Trust provisions need not be made
public.
Generally, the
settlor is the trustee (and beneficiary) of a revocable living trust during
life. Thus the settlor retains complete control over and ownership interest
in the trust assets. Both spouses generally act together as co-trustees of
a joint trust. When one spouse becomes incapacitated or dies the remaining
spouse can be the sole trustee.
When the
settlor/trustee becomes incapacitated or dies, the successor trustee named
in the trust instrument takes over management of the trust property without
court involvement. The successor trustee can be children, or other
relatives or friends who are responsible and in whom the settlor has
confidence. The successor trust can also be a bank, sometimes called a
"corporate fiduciary or corporate trustee". If the successor trustee
is also the beneficiary of the trust at the settlor’s death, the
successor trustee’s only duty may be to distribute the property to
him or herself at that time.
If the trustee
becomes incapable or unwilling to manage his or her assets during life, the
successor trustee named in the trust instrument can take over management of
the assets without a court having to appoint a conservator.
After death, assets
which would otherwise be paid outright to beneficiaries can continue to be
held and administered in one or more irrevocable subtrusts according to the
trust instructions, for example, for minor or disabled children. The
subtrust can remain in existence for the entire lifetime of the beneficiary
or terminate and the trust property be distributed outright to the
beneficiary at a specified age. Holding property in trust for a minor
incapacitated beneficiary can avoid a court-appointed guardian or
conservator for that beneficiary.
If a living trust is
used in an estate plan it is essential to "fund" it,that is to
transfer assets into it during the life of the settlor. If this is not done
the probate-avoidance advantages of a living trust will not be realized.
Some Myths of the
Living Trust:
1. In using the
living trust to avoid probate, you save on federal estate taxes.
No. Federal estate taxes have nothing to do with probate or the avoidance
of probate. Federal estate taxes are determined by an entirely separate
body of law which is contained in the Internal Revenue Code.
2. It is always
best to avoid probate.
Not necessarily. In most cases it is good to avoid probate, thereby saving
money and time for the administrator. However, probate can be a good option
when there is a great liklihood that someone will contest the
decedent’s estate plan because of the more immediate court
supervision. Probate may also be better if there is a good reason to impose
a supervisory control over the person responsible for administering the
estate.
3. Holding
property in joint tenancy will avoid probate and is the best way to go.
Although it is true
that joint tenancy will avoid probate, it is probably the worst way to
transfer property at death. It allows for no proper estate planning. It can
cause the recipient significant income tax problems upon a subsequent sale
of the property. Additionally, at the time the joint tenancy is created, it
can give rise to a gift tax, and the "transferred" property may
subsequently be included in the donor’s estate at death for estate
tax purposes.
4. To avoid
probate all you need do is create the trust.
No. You must transfer
property to or "fund" the trust. Simply signing your name to the
document will not automatically transfer your assets to the trust. Also,
once you have created and funded your trust, you need to maintain and
update your trust.
5. A Living Trust
is easy to use.
Yes, as long as you maintain good records, keep your trust up to date, and
properly administer the trust upon the death of a settlor.
6. If you have a
trust and a settlor (or creator of the trust) dies, you have nothing to do.
No. It is important
for you to contact a qualified estate planning attorney at this time. If
certain formalities and requirements must be met or there is a potential
for serious delays in administration as well as tax problems.
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