Revocable Living Trusts

Living Trust (2)A revocable or “living” trust is used primarily as a substitute for a last will and testament.  It is called a “living” trust because it manages your property both during your lifetime and upon your death.

There normally are three parties to a living trust.  The settlor, which normally would be you, creates the trust by transferring your property into the trust’s name.  When you do, title to the trustee property is no longer in your name (“John Doe”), but in the trust’s name (the John Doe Trust”).

The trustee is the person who the settlor designates to manage the property in the trust according to the trust’s provisions.  In many cases, the settlor and the trustee are the same person – YOU!  In other words, you can act as the trustee during your lifetime, and name another person as your successor trustee to take over upon your death or if you become unable to manage the trust’s affairs.

The beneficiary is the person or entity that you designate to receive any income from the trust, and distribution of the property held by the trust.  For example, the settlor can name himself as the beneficiary during his lifetime, and provide that his children or a charity receive any trust property left over upon his death.

How is a living trust created?

To create a living trust, your attorney prepares a legal document called a “declaration of trust” or a “trust agreement.”  Both the settlor and the trustee must sign this document.  The, the trust must be “funded.”  This means that title to all your property, which is held in  your name, must be transferred into the name of the trust.  For example, your house is held by “John Doe,” and is now held in the name of “the John Doe Living Trust.”

Can you revoke or change your living trust?

Yes.  The trust agreement provides that the settlor — YOU — reserves the right to cancel or to alter the trust document during your lifetime.  This gives you the flexibility to get out of the trust if your circumstances change, such as a divorce, disability, etc.  Of course, once you die, the trust is no longer “living,” which means it becomes irrevocable.

Does a living trust replace having a will?

Almost never.   Even if you create a living trust, your attorney will recommend that you also draft a very simple will called a “pour over” will.  Your “pour over” will names your living trust as the beneficiary of any of your property that is not already in the living trust at the time you die.  Sometimes, you may have simply forgotten to transfer title of some property to your living trust, or may have acquire new property so near the time of your death — or even at the time of death (e.g., life insurance proceeds) — that you had no chance to transfer it to your living trust.   The “pour over” will does this “patch” job, and the living trust remains the principal document controlling how your property will be distributed.  There are other reasons why you might want a will in addition to your living trust.  For example, you normally would use your will, rather than your living trust, to designate the person or persons you want to act as guardians of your minor children.

Will a living trust avoid the delay and costs of probate?

Yes.  After your death, the property in your living trust is administered by your trustee, not by an executor in a proceeding brought in the probate court.  This saves money because the various costs of probate administration normally are calculated as a percentage of the value of your property.   Of course, you must still pay the trustee and any attorney they hire to administer your trust after your death.  This also saves time, because the typical probate administration can last from 1-2 years.  In most cases, trust administration is much faster, and the trust property can be distributed more quickly to your beneficiaries because the trustee does not have to get any probate court approval.

Is a living trust better in any other ways than a will?

Yes.   Unlike a will, which becomes a matter of public record when it is filed with the probate court,  the public normally has no right to know the provisions of your living trust.  In many cases, you may have good reason not to want your wishes generally known.

If you own a family business, your trustee can simply continue on managing the business without interruption.  If you have a will only, the person who you name as executor must apply to the probate court to be appointed executor.  This leaves a time gap between the time of your death and the executor’s appointment when no one is legally in charge of your business.

If you own real estate in more than one state, and only have a will, your executor will have to apply to probate in each of the states where your property is located.  This is known as “ancillary probate jurisdiction,” and it adds to the cost of distributing the property.  With a living trust, there is no need for this multi-state chore.

When might you not want a living trust?

Because it is a more complex legal document, a living trust generally is more expensive upfront.   Your attorney charges more because of the complexity, and you have the costs of funding the trust by transferring title to all your property into the trust’s name.  In every case, you must balance the higher upfront costs of creating a living trust against the anticipated higher costs associated with probating a will.   Besides upfront cost, a living trust requires more supervision by you during your lifetime, since you must remember to put any new property in the trust’s name when you acquire it.

Who can serve as trustee?

You, as the settlor, will name a successor trustee or co-trustees, someone who can take over management of the living trust if your die or become mentally or physically incapacitated.  This avoids having to get a court to appoint a conservator.  Who to pick as successor trustee?   Think carefully about this decision.  It can be a family member, friend, or even a financial institution.  The important thing is to pick someone you can trust, and someone who is competent to handle financial affairs (with the help of an attorney).  You may decide to require bond of your trustee, but the costs of bond premiums is paid by the trust.

Do you still need a durable power of attorney and healthcare directive?

Yes.  Even if you create a living trust, you should also execute a durable power of attorney for finances and a power of attorney for healthcare as a complement to your estate plan.  A durable power of attorney is required to have someone manage you everyday financial affairs if you become incapacitated.  Your trustee can manage the trust property, but it does not give him the right to conduct your other financial affairs.  You must designate a person to make your healtcare decisions for you, and even if you would not trust this person with your financial affairs, you have great confidence in him as a healthcare decisionmaker.  of course, you can include a provision in your living trust requiring the trustee to pay for your medical expenses should you become incapacitated.

Will a living trust lower your estate or gift taxes?

No.   A living trust has many advantages, but because it is revocable, it has no tax-avoidance advantages.  During your life, you continue to pay income tax on trust income just as if the trust property was still in your name.  In general, a living trust is not effective to avoid estate and gift tax.  Avoiding estate tax usually means transferring property permanently to another person or entity during your lifetime — in other words, into a trsut that is not revocable.  At your death, however, any property held in a living trust becomes part of your “taxable estate,” even though it is not held in your name, and is subject to estate and gift tax.  Of course, only fairly large estates ($5 million) incur estate and gift tax.  For smaller estates, however, living trusts are effective as probate-avoidance tools.  Your attorney can help you determine whether you have any potential tax issues that might not be addressed by a living trust.

Does the trustee have a duty to inform the beneficiaries?

It depends.  While the living trust remains revocable, the trustee has no such duty.  Once the trust becomes  irrevocable (e.g., once the settlor dies), however, the trustee has a duty  to keep the beneficiaries informed of information that may be necessary for them to protect their interests in the trust.  Once a year, the trustee will be required to account (i.e., give a written report) to the beneficiaries concerning the status of the trust and its property.

Summary of Advantages of a Living Trust over a Will

  • Minimizes or eliminates estate and gift taxes for married couples
  • Avoids delays and costs associated with probate court intervention
  • Does not become a matter of public record, and ensures the confidentiality of your affairs and wishes
  • Seamlessly continues to manage your property if you become incapacitated
  • Avoids reliance on powers of attorney, which may go “stale” over time
  • Avoids opening separate probate in every state where you own real estate
  • · May create various sub-trusts to care for family members with “special needs,” or to give to a charity
  • Protects the property you leave to your family from being lost through divorce, bankruptcy, creditor lawsuits, or the family member’s “bad” habits, such as poor money management, substance abuse, or spendthrift.
  • Conserves and protects your property so it will be there not only for your children, but their children, and on and on . . .
  • Prevents accidental or inadvertent disinheritance through remarriage
  • May contain your very detailed instructions on the uses of your money after your death or incapacity, for example, providing special incentives for family members to obtain goals, like college, marriage, or grandchildren, etc.
  • Decreases the risk that someone will contest and set aside your final wishes