What Is A Living Trust?

A trust is a legal relationship in which one person holds legal title to property, with the obligation that he or she use such property for the benefit of another person. A trust is made by signing a written agreement, called a Trust Agreement, in which all of the terms and conditions of the trust are stated. The person making the trust agreement is called the Settler, Trustor or Grantor; the person holding the assets in trust is called the trustee; and the person for whom the asset are held is called the beneficiary. Such trusts are variously called living trusts, or lifetime trusts, or by the Latin name, inter vivos trusts.

As stated, the trust is for the benefit of the Settler's beneficiaries — the persons who are designated to receive the principal and income of the trust. Generally, the Settler is also the Trustee and the beneficiary of the trust. The Trust Agreement therefore normally provides that the assets are to be used for the Settler during the Settler's life, and after the death of the Settler, the remaining trust assets are to be distributed to the Settlers's remainder beneficiaries as designated in the Trust Agreement, for example to the Settler's children, and the trust ends. Since the trust directs the manner of distribution of the assets in it, and since generally one's estate is arranged so that the majority of his or her assets are placed into the trust, then the living trust becomes the primary instrument which disposes of one's assets, rather than one's will.

Most such trusts are revocable (that is, they may be changed or even terminated as the Settler desires). Others are irrevocable (that is, their terms cannot be altered and will continue until ended by the terms of the particular trust). We write here primarily about revocable trusts, which are the more common.

In addition, trusts can be classified as living, or lifetime, which are in effect during one's life, and testamentary, which are created by one's will, and go into effect upon one's death. We are focused here primarily on living, or lifetime, trusts.

Major Benefits Of Living Trusts

The benefits which living trusts give are many, some of which exist regardless of the state of one's health, and regardless of the extent of one's wealth, although those and other factors are often considered in determining whether or not to create a living trust. Basically, the major advantages are as follows:

Avoidance Of Probate

Living trusts are perhaps first thought of and best known for their high degree of avoidance of the probate process. Probate is a court supervised process whereby the court first assures that all of a decedent's valid debts are paid, and then that a decedent's assets are transferred to the person who under the law is entitled to the asset. To understand the concept of probate, first think of an asset which you own in your own name alone, such as your car. It's ownership is represented by a title issued to you, with your name on it as the legal owner, by the State Department of Motor Vehicles. When you die, somehow, the State Department of Motor Vehicles has to be legally directed to transfer the title to the car from you to the person you desire to have the car. The probate process does this, and results in a court order finding that your debts have been paid, that your beneficiaries are the owners of your assets, and directing their transfer accordingly.

The importance of probate, and of living wills, is that only assets which you own in your own name alone go through probate. Some assets, such as jointly held assets with a right of survivorship (which automatically go to the last survivor of the joint owners), or life insurance or retirement plans pass outside of probate. Other assets do not, however. If these assets are placed in a living trust, though, the assets are owned under the terms of the trust, not by you alone, and they also pass outside of probate. Thus by placing your assets in a trust, to a large extent you can avoid all of the time, trouble, anxiety, and expense of a probate proceeding. This factor alone is quite often the primary factor in some people's decision to create a living trust, as probate expenses are generally between 3 and 6 percent of your estate, and avoidance of probate often results in significant savings for one's heirs.

Relief From Financial Routine

Temporary Absences

With a living trust, the trustee assumes responsibility for all the important but routine duties involved in the protection and care of the assets and securities in the trust. It is both easy and costly to fail to sell stock promptly, to overlook stock rights, misplace assets, and so on. If you reach a point in your life at which you no longer desire to mind all of your property and financial affairs, then if you have formed a living trust, you have the ability to transfer that responsibility to the successor trustee whom you have named in your Trust Agreement. In addition, if you desire to temporarily be relieved of such matters, such as when you take an extended trip and desire to assure that someone is minding your assets, then you have the ability to appoint your successor trustee to do so, and resume the trusteeship of your trust when you return.

Incompetency Protection

Unfortunately, any one of us may eventually suffer from illness, forgetfulness, or some sort of incapacity or incompetency, whether temporary or permanent. If one hasn't provided for such circumstances in advance, by means of a trust, durable power of attorney or otherwise, then it may be necessary to go through a court procedure, under an act called the "Baker Act", to have that person legally declared incompetent, and a court appointed guardianship established. Such an incompetency action is often difficult, expensive, and most importantly hurtful and misunderstood by the person who is asserted to be incompetent. If one has established a living trust, however, the trust instrument is drawn with the Settler having nominated a successor trustee, and having specified the circumstances under which the successor trustee takes over the administration of the trust. A "Baker Act" procedure can then be avoided, and you can rest assured that you have in advance provided for any possible period of incompetency - you appoint the person who is to supervise your assets, that is, your successor trustee, not a court. If you recover competency, then you can of course resume your duties as trustee. The trust thus provides the peace of mind of knowing that in any circumstance, you and your assets will be properly taken care of.

Coordination Of A Whole Estate Plan

Your attorney, in designing your living trust, will coordinate it with your overall estate plan. This will assure continuing protection and management for you and your beneficiaries in the years to come. In short, he or she will make your living trust part by taking into consideration your needs and desires, those of your beneficiaries, your assets, and the manner in which you hold your assets.

Reduces The Likelihood Of Success Of Legal Challenges

A living trust can reduce the likelihood of success of legal challenges, such as those to a will. It is harder to question a living trust that you established and guided yourself, as the trustee thereof, for many years during your life.

Minimizes Publicity

A will is a matter of public record, but a living trust is private, not subject to the notoriety and publicity sometimes given wills. In some states, even the extent of your assets are public knowledge, yet are private with a trust.

Reduces Estate Settlement Costs

When one establishes and utilizes a living trust, the trustee fees associated therewith are generally much less that the expenses, personal representative's fees and other administrative costs involved in probating an estate. Remember, a trust substantially avoids the probate process.

Offers A Preview Of The Administration Of Your Estate

During your lifetime, you can observe your trust in operation, and you may alter or amend the trust as your experience in utilizing it suggests. Changes in the situation of different beneficiaries can be readily met, and administrative provisions can be added if new needs arise. You may even "test" your alternate trustee in advance, by appointing him or her, and observing the way he or she functions. If he or she does not preform as you desire, then you may change the alternate trustee.

Assures Continuity Of Management

A trust may assure that one's assets are managed in an orderly and continuous fashion, without interruption during periods of illness or after one's death.

Reduces Estate Settlement Time

If an estate has to go through probate, the time which is required to complete the probate process, depending upon the assets of the estate, may range from six months to two years. If your assets are held in trust however, remember that they avoid probate. After your death, your successor trustee takes over, notice thereof is mailed to the holders of the assets, and often distribution of assets can be accomplished very quickly.

Tax Matters

Sometimes, people think of trusts as being vehicles to avoid estate taxes. While trusts can assist in reducing or eliminating estate taxes, as the case may be, a trust is not necessary to do so; the decision as to whether you should establish a living trust should not be made based upon estate taxes, as the power you retain over your trust, if it is a revocable trust as it normally will be, will cause the assets in it to be taxed as if you personally owned them at your death. Either a trust or a will can be drawn to take maximum advantage of the estate tax laws.

With regard to income tax matters, a revocable living trust formed by one who retains the power to control it and revoke it is classified as a "Grantor" trust under the Internal Revenue Code. Because of such a classification, the trust is generally ignored for income tax purposes, and you continue to be taxed as if the property were in your own name. In essence, there is generally no change in one's income tax matters.