A living trust is a legal document that spells out an individual’s wishes concerning his or her assets, dependents, and other affairs, which are to be handled by another person, called a “trustee.” A trust is created by the individual, called a “Trustor,” at any point during his life, appointing a trustee, and detailing what is to be dealt with, and how. A living trust may give the trustee power to take care of the individual’s affairs after his death, or during his lifetime, perhaps in the event he becomes incapacitated. To explore this concept, consider the following living trust definition.
Definition of Living Trust
- A trust that becomes effective during the lifetime of the Trustor.
12th century English common law
What is a Living Trust
A trust is a legal arrangement in which an individual’s assets are placed in the legal ownership and care of a Trustee, who holds and manages the assets for the Trustor’s benefit. Most trusts go into effect when the Trustor dies, having left instructions for how the Trustee is to manage and distribute his assets. A living trust, however, goes into effect while the Trustor is still living. This may occur immediately upon creation of the trust, on a specified date, or if a certain event occurs, such as if the Trustor becomes incapacitated for some reason.
A living trust may be a good option for managing assets for an individual who has complex financial circumstances or business interests, or a blended family. The named Trustee may be anyone the Trustor believes will handle his affairs competently, such as a family member, a close friend, an attorney, an accountant, or other professional advisor. The Trustor may name himself as the Trustee of his trust, naming another individual to take the position of Trustee after his death.
Living Trust vs. Will
Both a will and a trust allow an individual to specify the conditions for how their property and assets will be distributed after death. Which form will be of the greatest benefit to the individual depends on his circumstances. Even people of modest resources have an estate, and plans must be made for its distribution. Because a living trust takes effect while the individual is still living, it may be of great benefit to some people, who have many assets to manage, but a waste of time for others, who have no need of such help. A will, on the other hand, is a written document that only goes into effect after the individual’s death.
Advantages of a Trust
One of the most important things to understand about a trust, whether a standard or living trust, is that it must be funded. This means that ownership of the individual’s property and assets must be properly transferred to the trust. This includes any assets mentioned in the trust, including real estate, homes, automobiles, bank accounts, investment accounts, and other assets. Benefits of creating a properly funded trust include:
- Having control over how assets are dealt with after death
- Planning for the management of assets in the event of incapacity
- Being able to appoint a legal guardian for minor children
- May be used for any size estate
- Maintaining confidentiality, preventing financial affairs from becoming public record
- Avoiding probate
Disadvantages of a Trust
There are certain drawbacks to creating a trust, such as the fact that it is absolutely useless until it is funded. A standard or living trust is also more expensive to set up than a will, especially if an attorney is hired for the task. To save a bit of money, many people who hire an attorney to create their trust, fund it themselves. This requires some time a legwork, as deeds are created and filed to transfer real property into the trust, bank accounts are created or transferred, and titles to motor vehicles and other personal property items are transferred into the trust. Once this is done, the assets will officially be owned by the trust, and the Trustee will take over management of the assets whenever specified in the trust.
Advantages of a Will
A will is a fairly simple document to create, though it must be properly signed and witnessed to be considered valid by the court. A will simply names an executor, who is responsible for ensuring the provisions of the will are taken care of, and lists the individual’s assets, and to whom they should be given after he has passed away. When creating a will, the individual may name someone as guardian of his minor children, should their other parent not be able to care for them. Because the will goes into effect only on the individual’s death, and no transfer of ownership of assets occurs until they are given to the named heirs, there is no need for it to be funded.
Many people hire an attorney to create their will, to ensure all of the required elements of language are included, and to ensure it is properly signed. This is a much less expensive prospect than the creation of a trust. There is no requirement to use an attorney, however, so anyone can write out a will, sometimes referred to as a “Last Will and Testament,” and sign it before witnesses. It is important to check the witness requirements in the state in which the will is created.
Disadvantages of a Will
While being easy and inexpensive to create, a will does have certain disadvantages. Of primary importance to some people is the fact that a will must go through the probate process, which takes time, and may be difficult, depending on the complexity of the estate, and whether someone chooses to contest any of the will’s provisions. This means that, although an individual has named an executor to ensure their stated wishes are carried out, a judge may ultimately end up deciding how his assets are distributed.
Other disadvantages of a will include the fact that it does not provide for the management of the individual’s assets should he become incapacitated for any reason, and it becomes a matter of public record once the probate process is complete.
Revocable Living Trust
A revocable living trust requires a person to transfer their assets to the trust. The grantor retains control of the assets, as they become the trustee. The grantor can change or dissolve the living trust at any point. Upon their death, the assets pass directly to the named beneficiaries immediately. Assets transferred upon death with a revocable living trust are subject to estate taxes.
Irrevocable Living Trust
A living trust, which takes effect while the Trustor is still living, may be made revocable or irrevocable. A revocable living trust may be altered, amended, or even revoked or terminated by the Trustor at any time during his lifetime. An irrevocable living trust is set, and cannot be altered, amended, or revoked at any time. Because ownership of specified assets is transferred to the trust permanently, individuals should give careful thought to creating and funding an irrevocable living trust.
Although a standard trust does not go into effect until the Trustor’s death or incapacitation, assets put into such an irrevocable trust are also permanently transferred. This means that, even if the Trustor changes his mind while he is still living and of sound mind, the trust cannot be changed or revoked.
Assets in an irrevocable living trust are removed permanently from the Trustor’s estate, which has certain tax consequences. Those assets, which now belong solely to the trust, and are under the management of a Trustee who is someone other than the Trustor, are not subject to estate taxes. The irrevocable living trust is the least commonly used trust, being reserved for special situations in which the Trustor is seeking the tax benefits provided to his heirs and beneficiaries.
Terms of a Living Trust
The terms of a living trust are specified in the text of the trust itself. What may be included in a trust, and how it must be stated, is governed by the probate laws in each state, making it important for anyone creating a trust to understand their local laws. Failing to adhere to these laws may leave the Trustor liable for problems that arise from the trust, or invalidate the trust. If the Trustee fails to adhere to the terms of the trust, or mishandles the trust assets, he may be held liable by the court. For example, Bob is named Trustee of his friend’s trust, with the responsibility to invest certain funds for the purpose of increasing the trust’s value. If Bob does not invest the funds, or does so negligently, he may be liable for any income that has been lost.
How a Living Trust Avoids Probate
Probate is the process by which the court distributes the assets of an individual who has died. If the individual, referred to as a “decedent,” left a will specifying which assets are to be given to specific beneficiaries, the court commonly follows his wishes. If there is a problem, the judge will appoint an executor, and decide how the estate is to be administered. Probate proceedings can, in the event there are problems, take months or even years to complete.
Because ownership of an individual’s assets is transferred into a trust, to be managed by the Trustee, these assets are not subject to the probate process. Even a living trust avoids probate, as the assets are moved into the trust, being managed by the Trustee while the Trustor is still living. An important consideration of funding a living trust is that ownership of all assets intended to be managed and disposed of by the Trustee must be transferred prior to the Trustor’s death. This means that assets obtained after the original funding of the trust must be put into the Trust’s name, or they may become subject to the probate process upon the individual’s death.
What is a Pour-Over Will
Most people who create living trusts also use a pour-over will, which, rather than specifying how each asset is to be distributed, simply states that all of the individual’s assets are to be transferred into the trust, then distributed by the Trustee. A pour-over will is beneficial in that it takes care of assets the individual may have failed to transfer into the trust before death, thus avoiding probate. Unfortunately, a pour-over will must, like all wills, go through the probate process. This may delay the assets on their way into the trust, and therefore delay their distribution. While assets left directly through a trust can be distributed quickly, usually within a few weeks, after the Trustor’s death, probate of a pour-over will may prolong the trust.
Example of a Pour-Over Will
Bob transfers his valuable property into a living trust, and creates a pour-over will that stipulates any property or assets not specifically named in the will goes into his living trust on his death. The property is then to be distributed to his son, the sole beneficiary, after probate of the pour-over will is completed. All of the assets left directly through Bob’s trust can be immediately transferred to the beneficiary according to the instructions in the trust. The trust must be kept open, however, until all of the assets flowing through the will completes the probate process and then into the trust before they can be distributed.
Living Trust Forms
Although it is common for people creating a living trust to enlist the help of an attorney, living trust forms are available online. Living trust forms give an individual desiring to create their own living trust a guideline for what should be included, but can be tailored to the person’s specific needs. While each form differs slightly, they all include certain basic information, such as the purpose of the document, identity of the Trustor, appointment of a Trustee, funding specifications, and beneficiaries.
Any person who needs help creating their trust, even if following the guidance of living trust forms, should seek legal advice, as a poorly constructed trust, or a trust that does not meet the requirements of the law may be deemed invalid. Once the trust has been created, it should be signed by the Trustor before a notary public.
Related Legal Terms and Issues
- Assets – Any valuable thing or property owned by a person or entity, regarded as being of value.
- Beneficiary – A person or entity who receives property or assets according to a will or trust.
- Grantor – A person that creates a will or a trust.
- Incapacitated – To be unable to act or respond.
- Liable – Responsible by law; to be held legally answerable for an act or omission.
- Probate Court – The division of the judicial system that deals with matters relating to wills, trusts, estates, guardianships, and conservatorships.
- Public Record – Any information kept by a governmental entity that is accessible to be viewed by the public. Such information may be anything from a recorded deed to a civil or criminal judgment.
- Trustee – A person given control of property according to a trust.