Living Trust question - who needs a Living Trust?

A frequently asked Living Trust Question is what is the definition of a Living Trust? A living trust is a legal entity capable of owning property. A living trust is made between living persons, hence the legal term "inter vivos trust", (between the living). A living trust may be revocable, or irrevocable. Unless the trust assets are very large, the trust is normally revocable at will by the Trustor. It is only upon their death that the trust becomes irrevocable.

Who needs a Living Trust?
This is a common Living Trust question. A trust may be appropriate for any person who would leave assets after their death that would other wise use a standard will. Reading the other FAQ will help to answer this question.

Another frequently asked Living Trust question is who owns the property in the trust? When property is placed into a trust, the trust, not you, owns that property. However you own the trust, if you are the beneficiary. This doesn't mean that you no longer have control of those assets, you can have full control. Normally the grantor, will appoint them self as the trust's initial trustee, to retain complete control of the trust assets. You can transfer property out of the trust or add property into it. A trust allows the quick and efficient distribution of the trust property to loved ones after your death.


What is an estate?
Under common law, an estate is comprised of the tangible and intangible assets of real and personal property which belong to a natural person. This includes real estate, bank accounts, retirement accounts, royalty income streams, websites and domains, other passive income, life insurance proceeds, etc. More recently, the concept of an estate has been expanded to encompass any thing of value to which the deceased person was or might have been entitled to claim during his or her lifetime. The property of the estate may either be bequeathed through a will, a trust, or transferred through the laws of intestacy when there is no will.


The AB Living Trust
An AB living trust (also known as an exemption trust) is preferable for many married couples, with larger estates, over a traditional joint trust because of its flexibility and potential tax benefits for the ultimate heirs. Generally speaking, the tax benefits become significant in estates valued at over two million dollars. Upon the death of spouse "A" the estate splits into two portions, A and B, with the deceased "A" portion becoming an irrevocable trust. The surviving spouse cannot sell the property in trust A, but can use the property and any income it generates. Trust B remains revocable and under the full control of party B.

When party B dies, all trust property is distributed to the heirs and retains the standard estate death tax exemption of each original spouse. The estate tax exemption currently (in 2007) is $2,000,000 per estate so this can shield up to $4,000,000 from estate taxes under the A B Living Trust. The estate tax is currently in flux so the future value of the A B Living Trust is unknown. Given the state of the Federal budget deficit, I expect estate taxes will not go away, and are likely to rise in the future.

Another frequently asked Living Trust question is what are the disadvantages of the A B Living Trust? The most significant disadvantage is that the surviving spouse cannot sell their spouse's share of the property. Since there are no estate taxes due on property transfers between spouses, the tax benefit is not important to the surviving spouse, just their heirs.

Administrative costs are another disadvantage of the A B living trust. The surviving spouse must keep separate books and records for the two portions of the trust. This may be expensive and burdensome, and may be unnecessary with the potential changes to the estate tax law.


Living Trust vs. Will
Living trusts and last wills are both used to distribute property to beneficiaries, but there are important differences. When a person dies with just a will, the estate goes to Probate Court to be settled. Probate is an expensive process that can take over a year to conclude. A living trust eliminates probate court and it quickly and smoothly transfers assets to your beneficiaries. Because a living trust is never registered with the courts, details of the estate stay private.

Another frequently asked Living Trust question is what is a Pour-Over Will or Living Trust Will? When making a living trust, it is common practice to create what is called a pour-over will clause. This provides that any assets of the deceased not included in the Living Trust "pour-over" into the trust for distribution with the other trust assets. A pour-over will can also allow you to name a guardian for any minor children.


How does a trust distribution work?
After the Grantor, or the Grantor and Grantor's spouse (in the case of a joint trust) pass away, the person identified as successor trustee in the trust document assumes Trusteeship. The successor trustee transfers ownership of the assets in the trust to the beneficiaries named in the trust document. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the living trust ceases to exist. In other situations the trust may continue to hold and manage assets and exist for decades to provide support for minors, other family members or beneficiaries.

Another frequently asked Living Trust question is how long can the trust last? A trust cannot last forever, generally no longer than the until the last of the trustor's grandchildren reaches age 21.


What is probate?
A will is the most commonly used legal instrument for the distribution of the tangible assets of a deceased person. Before property can be disposed of pursuant to the terms of a will, the will must be submitted to the probate court having jurisdiction over the will of the deceased. Probate is often a relatively lengthy and expensive process. Probate may provide greater safeguards to the rights of a deceased person's beneficiaries, though probate often is contested by creditors or disgruntled members of the family of the deceased who feel they have not received their fair share of the deceased's property.

Why use a living trust?
This is another frequently asked Living Trust question. In order to expedite the process of transferring assets to intended beneficiaries, many people arrange their estate so that it can bypass the probate process after their death. Placing property into a trust before death allows property distribution without coming under the jurisdiction of a court. Similarly, jointly held property, life insurance, annuities, 401(k) Retirement Plans, and Individual Retirement Accounts (IRAs), will also avoid probate as these devices allow property to transfer to beneficiaries outside the probate process.


Is a Living Trust a Living Will?
This is another common Living Trust question. No, both are part of an integrated estate plan, but they perform entirely different functions. A Living Trust is used to manage the estate asset's and to transfer them upon the death of the Trustor, much like a Will. A Living Will on the other hand states the medical care preferences of the person who made it, specifying what type of care they wish to receive if they become incapable of making decisions on their own power.

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