Living Trusts: An Introduction

A living trust--an inter vivos trust if you want to be formal--allows you to put your assets in a trust while you're still alive. If your living trust is revocable, as almost all are, it gives you great flexibility. You or someone in whom you have confidence manages the property, usually for the benefit of you or your family. Most people name themselves as trustees, and find there is no difference between managing the trust and managing their own property--they have the right to buy, sell, or give property as before, though the property is in the trust's name rather than their own.

A living trust is one of the two main ways to avoid probate. (The other is joint tenancy or survivorship.) One of the purposes of probate is to determine the disposition of the property you leave at death. Since the trustee of your living trust owns that property, there is no need for probate.

Living trusts have become extremely popular in recent years. Even though they're a useful, simple, and relatively inexpensive way to plan your estate, they do not magically solve all your problems.

For example, as states have simplified their probate procedures, many of the advantages of trusts have diminished. And though they're great for some people, you can't assume they're great for you.

living trust is right for you depends on the size of your estate, what kinds of assets it contains, and what plans you have for yourself and your family.

Should You Have A Trust?

Living trusts has often focused on controlling costs and avoiding probate, but many lawyers think this misses the far more significant features of living trusts.

The living trust, while offering advantages over probate, isn't guaranteed to save you money. If your records are well-organized, your assets are simple (not necessarily small, just easily identified), your beneficiaries aren't contentious, your state has inexpensive probate procedures for estates of your size, and your probate court and lawyer are efficient, legal costs of probate might be so low that it costs less to pass the property through a will than via a living trust.

Besides, since you should have a will even if you do use a living trust, you'll be paying some court fees anyhow, even though most of your property will be controlled by the living trust. And it might be possible to use other probate-avoidance techniques--joint tenancy, pay on death accounts, life insurance, and others mentioned in chapter two--that don't entail the costs of a living trust.

You may want to determine how much probate will cost your estate and compare it to the costs, financial and otherwise, of a living trust for the same size estate. An easy way to decide whether a living trust is right for you is to show your lawyer your list of assets and ask if, under all the circumstances, a living trust will save you money.

However, don't forget the many situations more important than any cost savings. For example, the advantage to an older or ill person is that a living trust avoids an expensive and undesirable court proceeding with a court appointed guardian or conservator.

Here are two other examples of how a living trust can help.

• Mary is a widow, without children and any close relatives. She is no longer able to live alone in her home or to handle her finances. She transfers her property and other assets to a trustee, who will sell the home and invest the proceeds, along with the other assets, under a revocable trust, to provide for Mary's support during her lifetime and to dispose of the same after Mary's death to such persons or charitable organizations as Mary desires. Should Mary change her mind as to any of them, or should an old friend for whom she had provided a gift, die, or should she change her mind as to any recipient, Mary can make a simple amendment to the trust by a written letter or memo signed by her and delivered to the trustee. No witnesses are necessary.

• John is a doctor in his early 40s. He resides with his wife, Jane and their 5 children, ages 2, 4, 6, 8, and 10 (with expectation of more) in their home. He has a good income from his practice and is gradually building up an estate. However, in the event of his death or disability, he would not be able to provide the desired support for his family. He is able to purchase a large life insurance policy on his life. By creating a declaration of trust or revocable trust agreement with himself and Jane as trustees, and with trust company or individual as successor-trustees, and providing that the proceeds of the life insurance policy be payable to the trustees, John can provide for the support of Jane and the support and education of the children.

How They Work

Requirements for setting up a living trust vary with each state. In general, you execute a document saying that you're creating a trust to hold property for the benefit of yourself and your family, or whomever you want it to benefit. Some trust declarations list the major assets (home, investments) that you're putting in trust; others refer to another document (a schedule) in which you list the exact property that will begin the trust; or you may simply transfer the property to the trustee under the trust agreement. In any case, you can add and subtract property whenever you want. You will have to change the ownership registration on whatever property you put into the trust--deeds, brokerage accounts, bank accounts, etc.--from your own name to the name of the trust (e.g. The John A. Smith Trust). If you make yourself the trustee, you will have to remember to sign yourself in transactions as "John A. Smith, Trustee," instead of using only your name.

When you put property into a living trust, the trust becomes its owner, which is why you must transfer title to the property from your own name to that of the trust. But you retain the right to use and enjoy the property, and because you do, in the cold eyes of the tax authorities, the property in the trust belongs to you, the grantor, for tax purposes. If you receive income from the assets, you must still report the income from the trust directly on your income tax return. The trust itself often files a separate income tax statement as well, though the IRS doesn't require one if the grantor and trustee are the same person. It is advisable to apply to the Internal Revenue Service for an employers identification number for the trust.

You can make anyone you want the trustee. You can also name an alternative trustee (sometimes known as successor trustee) to take over in the event of the original trustee's death or incapacity.

In a revocable living trust, you keep the right to manage your property whether you're the trustee or not, since you have a right to change the terms of the trust, the trustee, and the property in the trust at any time. When you die, your alternative trustee distributes the property according to the terms of the trust. Usually, your alternative trustee is your surviving spouse or an adult child, but you can name a bank or trust company if you are willing to pay their fees. See chapter ten for more.

Living trusts can extend long after you die. If you want the trust to benefit your infant grandchildren, for example, you might specify that the trustee make gifts to them as needed until they are fully grown. Living trusts, like wills, give you wide flexibility in distributing your property. For example, the trust agreement could say "at my death, my trustee is to give my car to my son Cain, my coat to my son Jacob" and so on. Your instructions can tell the trustee to continue managing assets for the benefit of someone else, distribute them to any beneficiaries you choose, or perform some combination of these actions. If beneficiaries of your living trust die before you do, the property reverts to you, unless you've named other people (contingent beneficiaries) for those gifts.

Unless taxes are a worry--and they won't be in the vast majority of estates--you should be sure to retain the right to revoke or amend your trust whenever you wish (see chapter nine for more about this). Have your lawyer create a revocable trust agreement, which allows you to change the terms or trustee or just to forget the whole thing if it's too much trouble.

It can be a bother to set up and fund the living trust, but the payoff for your family comes when you die. If Ilda wanted her property to go to her friend, Rick, for example, she would put it in a trust and name him co-trustee or successor trustee. Then, when she dies, he becomes sole trustee, and acting in that capacity, transfers the trust property to the beneficiary--himself. Since the property does not have to go through probate, there's no break in continuity.

A living trust can contain other, separate trusts, which gives you a nice flexibility. For example, if you plan to leave some of your property to your minor children in trust (see next chapter), you could specify in your trust that the children's property goes into a separate irrevocable children's trust. You can design separate trusts for several beneficiaries, all funded (usually at your death) by the assets in your living trust.

Copyright 1999, 2000, 2002 American Bar Association