What Is a Living Trust?
The Living Trust
In general application, a living trust, sometimes called an inter vivos trust, is an arrangement established during an individual’s lifetime usually for that same individual’s benefit and continues to act as the main vehicle to distribute assets to successor beneficiaries upon the death of the individual. A living trust is usually revocable (meaning it can be changed) by the person creating it. A living trust is often viewed as the best tool to use to avoid probate.
A living trust in which the settlor, trustee, and beneficiary are one-in-the-same is called a “self-declaration of trust.” A living trust can also benefit someone other than the person who created the trust. For example, a grandparent can establish a trust for a grandchild as a lifetime gifting mechanism. This also would be considered a living trust.
A testamentary trust, in contrast to a living trust, comes into being and effect only upon one’s death. A common misconception is that a living trust is a substitute for a will. It is not. It is used in addition to a will, although the will is in a form that complements the living trust. A revocable living trust typically provides for the management of trust assets
a. while its creator is living and still has the capacity to manage his or her own financial affairs;
b. while its creator is living but no longer has the capacity to manage his or her own financial affairs; and
c. after its creator’s death for the benefit of his or her intended beneficiaries.
I Have Signed My Living Trust, Now What?
Too often people who have just signed their new living trust believe they have accomplished their goal of probate avoidance. Not true. They must take another step, which is to transfer appropriate assets into the name of the living trust and to make appropriate beneficiary designation changes. Your estate planning professional should give you direction in this regard. There are some assets that should not automatically be transferred or paid to the trust, such as an IRA or other qualified retirement benefits. It should not be assumed that your estate planning professional is responsible for making these asset transfers and beneficiary designation changes. This process is usually an additional service that can be provided by your attorney, but often you can do most of the necessary transfers and other changes if you have been given specific instructions.
A common misconception is that a living trust is a substitute for a will. It is not. Make certain your will is properly coordinated with your living trust. Too often, the will contains dispositive provisions other than to fund the living trust, and this may be contrary to your basic goals, such as probate avoidance.
The Advantages of a Fully Funded Living Trust
The advantages of a fully funded living trust, in addition to general trust characteristics of flexibility and creativity, include the following:
• avoidance of probate, resulting in faster ultimate distribution of assets and lower costs (This is especially true when assets are held in different states, which allows avoidance of ancillary probate proceedings. Remember, avoidance of probate also has to do with living probate (disability-related) proceedings as well as death related probate.);
• greater privacy;
• control of property and of the trust is retained because the trust can be changed when necessary by the settlor by its revocable nature and can further provide flexibility through granting powers of appointment and trust advisor provisions;
• lower costs of administration;
• successor management can be assured (“back-up trustee”) for uninterrupted management;
• professional management of assets can be provided;
• possible provision for someone else to manage your property;
• segregation of assets avoids commingling;
• less likelihood of being challenged in court by disgruntled relatives;
• having your “house in order” because the owner has facilitated the identification, gathering, and transfer of assets into the trust; and
• greater emotional security and assurance that everything is in order.
Make a decision to fully fund your living trust and follow through on implementing that decision. Too many people think just signing a living trust causes it to be “funded.” This is not true. You must take some additional steps to transfer each asset you own to the trustee in the trustee’s official trust name or change beneficiary designations to name the trust as beneficiary. This is no small task. In a sense, you are probating your assets while you are still living.
More To Think About — The Living Trust
A living trust usually has a higher cost associated with its preparation and implementation than a will. This higher cost is usually considered small, however, when you consider the costs and procedures of probate.
In order to fund the living trust, you must inventory and transfer all of your assets into the trust. This is not automatic. The process usually requires significant administration.
However, the burden and expense of funding the living trust is much less when the owner makes the transfer than when the legal representative must toil through probate to make the transfer.
Ownership and titling of assets may be more complicated with a living trust.
There should be a periodic review of the trust to consider proper titling of all assets and appropriateness of existing provisions and fiduciaries.
There are assets and activities that may not be covered by the powers of the trust:
governmental benefits (such as social security payments); employee benefits and other assets not owned by the trust (even though the death beneficiary designation will transfer the assets to the trust); government tax matters and other legal matters; and other assets not titled in the trust (such as your pocket cash, personal effects, etc.). You need appropriate ancillary planning and estate planning documents (like a well-drafted durable power of attorney for property) to cover these circumstances.
Without admission of the will to probate, the claims period is extended (in Illinois for two years rather than six months).
A revocable living trust is usually treated as a grantor trust for federal income tax purposes. This means the trust, during the lifetime of its creator-beneficiary, should not have to file a separate fiduciary income tax return (Form 1041) or Form 1099, and all income is reported directly on the individual income tax return (Form 1040) of the creator-beneficiary. The revocable living trust may use the creator’s social security number as the trust’s taxpayer identification number until the death of the trust’s creator or until professional counsel suggests an earlier time to acquire a separate taxpayer identification number. The rules in this regard are found in Treasury Regulation §1.671-4(b)(2).
Just as your will needs to be kept current to your situation and to law, keep your living trust current.