Inter Vivos Trust

The Latin phrase inter vivos translates as “between persons.” In the legal system, an inter vivos trust is also known as a “living trust.” This type of trust is one that can distribute assets to a beneficiary either during the trustor’s lifetime, or after his death. The duration of such a trust is determined when the trust is created. An inter vivos trust is the opposite of a testamentary trust, which goes into effect only after the trustor has passed away. To explore this concept, consider the following inter vivos trust definition.

Definition of Inter Vivos Trust

Pronunciation of Inter Vivos

in-ter vee-vohs

Noun

1. A trust that can be distributed either before or after the trustor’s death.

Origin of Inter Vivos

Latin inter vīvōs (“among the living”)

What is a Trust

A trust is document that specifies how a person, called the “trustor,” wishes his or her assets to be cared for and distributed to others. A trust has many advantages, and there are many types of trust. One advantage of a trust is to avoid the probate process when the trustor dies. This enables the assets to be distributed in a timely, and hassle-free manner. A trust also provides certain protections from tax liability.

Probate is the time-consuming and costly process of involving the courts in the distribution of the assets of the deceased. Worse still, a family’s private finances can become public knowledge in probate court. This is because goings-on in probate court are incorporated into the public record, so anyone who wants to can view the public record and see that particular family’s personal finances.

To establish a trust, the trustor names his beneficiaries, and a trustee. A trustee is the person who will be trusted to carry out the trustor’s wishes as expressed in the trust. In most trusts, the trustee is the trustor’s spouse, and the beneficiaries their children. However, the trustor should also name a contingent trustee in case both spouses pass away which, while unlikely, is not unheard of. It never hurts to prepare for the worst.

Consider the following example:

Martin wants to create a trust to make sure that his children are taken care of, and that his property is protected from probate, in the event of his death. He creates a trust and names his wife, Trudy, as the trustee. This means that, in the event something happens to Martin, Trudy will be trusted to carry out Martin’s wishes in accordance with his trust.

Martin also names his children, Lila and Troy, as his beneficiaries in the trust. This means that, upon Martin’s death, Trudy is to make sure that his property is distributed to his children as per his wishes established in the trust. Further, Trudy is to take care of any real estate taxes or other obligations as defined by the trust as well.

Martin also names his best friend, Eddie, as a contingent trustee. This means that if anything happens to both Martin and Trudy, and Trudy cannot therefore act as a trustee, then Eddie is to be entrusted to carry out Martin’s wishes as directed in the trust.

Trusts can be used to protect just about any kind of asset, from a car to a home to simple property that has had no buildings placed upon it. Certain assets, like real estate or investments, can be retitled under the trust to account for new ownership upon the trustor’s death. Some assets, like life insurance or retirement benefits, automatically transfer to their intended beneficiary(s), and so they do not need to be accounted for in a trust.

A will simply specifies which people should get what assets, and can be subject to a great deal of squabbling between beneficiaries. A trust is different from a will in that ownership of the trustor’s property must be transferred to the trust. This is what enables the trust to avoid probate. Because the assets are owned by the trust itself, a living trustee is free to distribute those assets according to the trust’s instructions, without intervention of the court.

Difference Between a Will and a Trust

However, a trust should not be executed without an accompanying will. The will functions as a kind of “net” to “catch” any issues that aren’t covered by the trust. This means that any assets not mentioned in the trust will be distributed in accordance with the terms of the will. A type of will, called a “pour-over will,” specifies that any assets not already in the trust are to be “poured over” into the trust upon the trustor’s death. This is a catch-all way to ensure everything is placed in the trust, even if it was overlooked at some point. A will is also used to establish guardianship for minor children, if necessary.

Inter Vivos Trust (“Living Trust”)

An inter vivos trust, or “living trust,” is a trust that protects the trustor’s assets while he is still alive. This type of trust is a vehicle for managing assets while the trustor is still living, which also has instructions for dealing with those assets after the trustor’s death.

The reason for its creation is to make it easier to transfer assets to a trustor’s beneficiaries without having to bring the matter before a probate court. Not only does this eliminate the time-consuming and costly process of probate, but it also protects the family’s assets from becoming public knowledge. Ultimately, an inter vivos trust is created so that assets can be transferred smoothly between the parties without any sort of disruption or obstacle in their way.

For example, an inter vivos trust can be established by a living, married couple. The trustor can be his own trustee because he is still alive, managing his assets until he is no longer able to do so, with his wife named as a backup trustee. She would then take over when the trustor is no longer able to manage his own trust. A living trust is “revocable,” which means that its provisions can be edited at any point while the trustor is still alive, and competent to make such decisions. Upon his death, however, the trust can no longer be changed, and so it becomes “irrevocable.”

Revocable Living Trust

A revocable living trust is a written agreement between the person creating the trust (“trustor”) and the person who is going to be trusted to manage his assets (“trustee”). The trustor can serve as his own trustee of a revocable living trust while he is still alive, and can make changes to, or revoke entirely, the trust as he sees fit. However, upon his death, the trust is no longer revocable and converts to an “irrevocable” trust. This means that the terms of the trust are now to be followed as written, and that the trustee must fulfill the terms of the trust in accordance with the trustor’s wishes.

Irrevocable Living Trust

There are two types of irrevocable living trust: (1) a revocable living trust that has been finalized due to the death of the trustor; and (2) a trust that is made irrevocable right from the start. At whatever point an irrevocable trust becomes irrevocable, the trustor is out of its management, and cannot change the terms nor cancel the trust.

Instead, an irrevocable living trust is used to transfer assets from the trustor to his beneficiaries. This then reduces the value of the trustor’s estate, which also reduces his tax liability. Once property is transferred into an irrevocable living trust, the trustor can never take it back. The terms of an irrevocable living trust are for the most part considered permanent.

Irrevocable living trusts are commonly used for tax purposes, and for setting aside assets according to a court order, or a settlement. This guarantees the trustor cannot take those assets back.

For example:

Michelle – Michael’s wife – filed for divorce, claiming she and the children had been abused for years under her husband’s control. Michael is quite wealthy, and as part of the divorce proceedings, Michelle requests that, in addition to $5,000 per month as child support, Michael be ordered to place $6 million in trust for their children. The court orders Michael to create an irrevocable living trust for the $6 million, and to name Michelle as the trustee, enabling her to manage the funds for the sake of her children.

This ensures the money is there for the children’s needs, as well as ensuring that Michael cannot take it back, change it, or have any control over its distribution. In such a case, the court would need to review the provisions of the irrevocable trust before it can be finalized, to verify that it is properly stated.

Living Trust vs. Testamentary Trust

A living trust is one that can be used during the trustor’s lifetime. While it may or may not be revocable during that time, it becomes irrevocable once the trustor dies.

A testamentary trust is, of course, made while the trustor lives, but does not go into effect until after his death. In other words, the assets transferred into the trust cannot be distributed until after his death. In this way, it has some similarities to a will – though most trusts are accompanied by a will of some type.

Because of this, testamentary trusts almost always have to go through the probate process. This can ultimately result in the court making decisions that may go against the trustor’s wishes. Estranged relatives with whom the trustor has not spoken in years could end up fighting over – and winning sections of – the trustor’s estate.

Consider the following example of a testamentary trust:

Ethel and Archie are a married couple, and the owners of an estate worth over two million dollars. When they have both passed away, their assets are to be placed into a trust fund, per their will. Then, when their two children reach the age of 18, the trust will be distributed to the children in an even split.

The bank that handled financial affairs for the family then becomes a trustee by making sure that compliance with the terms of the trust and the state’s law are met. This is an example of a testamentary trust, because all of this takes place after the couple has died, rather than a living trust which can allow for distributions while the trustor is still alive.

Inter Vivos Trust Example Involving a Developmentally Disabled Person

An example of an inter vivos trust can be found in a case concerning a developmentally disabled person and the creditors who went after her trust. In 1983, the guardian for Barbara Hertsberg, a developmentally disabled woman, filed a complaint in Wayne Circuit Court in Michigan on Barbara’s behalf. In the complaint, it was alleged that Edith Hertsberg, Barbara’s mother, had neglected Barbara by failing to use the Social Security benefits that she had received on Barbara’s behalf to properly take care of Barbara.

In January of 1986, a consent judgment was entered by the court, which ordered Edith to fund a trust – for Barbara’s benefit – in the amount of $150,000. The trust was established the following week, with Edith as its grantor. In the event of Barbara’s death, the trust was to then be distributed to several of Barbara’s relatives.

Because Barbara was a recipient of mental health services, she was also subject to the department’s financial evaluation. In May of 1994, the department determined that Barbara could access her trust to repay the state for nearly $91,000 in care provided to her by the department. Further, the department determined that an additional $729 per month going forward would be necessary to continue her care.

A representative for Barbara appealed the department’s determination, however the appeal was adjourned by the parties after they agreed that the matter should really be decided by a probate court. The court, however, ultimately decided that Barbara was the true settlor of the trust because she was technically the plaintiff in the original action. As such, because the court had determined Barbara to be both the settlor and the beneficiary of the trust, then this was an example of an inter vivos trust, which can be accessed to satisfy creditors.

A representative for Barbara appealed the probate court’s decision. The Court of Appeals reversed the probate court, holding that the probate court had erred in determining that Barbara was the settlor. Edith was the one to create and fund the trust. Barbara had contributed nothing to the assets in the trust. The mental health services department appealed this decision to the Supreme Court of Michigan, however the Supreme Court agreed with the Court of Appeals that Barbara was not the settlor of the trust, and ultimately affirmed the appeals court’s decision.

Related Legal Terms and Issues

• Asset – Any valuable thing or property owned by a person or entity, regarded as being of value.
• Beneficiary – A person designated as the recipient of money or other assets under a will, trust, insurance policy, etc.
• Consent Judgment – A judgment that is issued when two parties agree to a settlement in a lawsuit. The parties then draft up a settlement agreement for the judge to review and sign.
• Grantor – Someone who transfers the ownership of property to another person or entity.
• Will – A legal document in which a person specifies who should receive his assets upon his death.