Frequently Asked Questions about Living Trusts

A Living Trust may seem like a complex legal document that is designed only to help well-off individuals preserve family wealth. However, they can also be an incredibly helpful tool for estate planning that families of every size and economic background can use as a way to avoid probate and ensure that beneficiaries receive certain assets. This guide will explore living trusts, how they work, and who might be interested in using them as part of their complete estate plan.

What is a Living Trust?

A living trust, also known as a revocable living trust, is a legal arrangement that allows the owner of property to transfer ownership of that property to a trust (a legal entity that can contain real estate and other belongings) and then transfer ownership of this trust to another party while also retaining control of it during their lifetime. A living trust is put into place with a written document that is signed by the individual establishing the trust, known as the grantor, while being witnessed by a notary public. This document creates the legal entity into which the grantor can transfer their assets which are then managed by someone, known as the trustee. In a revocable living trust, the grantor and the trustee are often the same person. When the trustee dies or becomes too incapacitated to manage their own affairs, a successor trustee takes over managing the trust property. This successor trustee is then responsible for transferring the trust assets to the beneficiaries named by the grantor in the trust document. While effectively allowing the trust maker to retain control of the trust during their lifetime, the living trust allows ownership of the trust to pass to the ultimate recipients, the beneficiaries, upon the death of the grantor.

Basically, a trust acts as a financial arrangement between three parties that hold assets for a beneficiary. A trust is composed of three parties as follows:

Trustor -- This is the person who grants the trustee control over their assets, estate, or property, and who creates the agreement;
Trustee -- This is the person responsible for managing the trust that the trustor has appointed them over; and
Beneficiary -- This is the person who receives the benefits of the trust agreement, given the property or assets by the trustee from the trustor according to the terms of the agreement.

There are several different types of trusts with different uses and benefits:

A living trust, sometimes known as an inter-vivos trust, is the most common type of trust and is made by the trustor during their lifetime, with assets or property intended for their own use during their life. The trust provides for payment of income to the Trustor and the distribution of the remaining trust assets once the trustor dies. The person in charge of managing the trust, known as the trustee can be the trustor themselves, a bank, or some other third party that the trustor feels confident will be able to responsibly manage the assets of the trust. Most living trusts provide that the trustor will serve as the initial trustee to manage the assets of the trust until they become disabled, would prefer to have another party manage their affairs, or die. At this time, a new individual, known as the successor trustee will step in to manage the trust and make distributions as necessary and appropriate.
A testamentary trust, also known as a will trust, is an agreement made for the benefit of a beneficiary once the trustor has died and details how the assets must be endowed after the trustor's death. This type of trust is often included in a Last Will and Testament and attended to by the executor who will manage the trust for the trustor's beneficiaries after the trustor's death. This type of trust is often used to care for and educate children if both parents die before their children have reached the age of majority.

It is also possible to make special interest trusts that have a specific purpose in mind. For example, if you would like to create a trust to save money for a child's education that can only be used for that purpose until the child is old enough to manage the funds themselves, you can create an Education Trust Agreement.

What Goes Into a Living Trust?

The following assets are commonly included in a living trust:

Real estate properties;
Financial accounts (e.g. savings, brokerage, mutual funds, etc.);
Stocks or bonds not held in a separate account;
Business interests (e.g. LLC membership interests, shares in privately held corporations, partnership interests, sole proprietorships, etc.);
Intellectual property (e.g. patents, copyrights, trademarks, etc.); and/or
Jewelry, antiques, art, and other high-value personal possessions.

Real estate held in a trust often has a mortgage attached. If a beneficiary receives a property encumbered by an existing mortgage, they would be responsible for making the mortgage payments. It is possible to direct that the trust pay off the mortgage before the property is distributed to the beneficiaries, but there must be enough assets in the trust to do so.

Property of lesser value does not need to be placed in a living trust because it may be exempt from probate or subject to a highly streamlined probate process. Examples of assets not commonly held in trusts include personal checking accounts, property that is bought or sold frequently and not expected to be owned by the grantor at the time of their death, and vehicles unless they are particularly valuable such as vintage or rare automobiles.

What Does a Living Trust Do?

There are several main reasons to explore setting up and maintaining a living trust for the benefit of loved ones.

Avoids probate

The most common reason to establish a living trust is to avoid probate, which is the court-supervised process of winding up a deceased individual's affairs and estate. While probate can tie up loose ends, it's no secret that it can also be a lengthy, time-consuming process for those involved. Noting this, most grantors turn to a living trust as a means to avoid it and spare their heirs the hassle by avoiding courts entirely. Property bequeathed under a living trust can transfer to beneficiaries without going through this extended probate process.

Maintains privacy

Court records are public and it is not uncommon for the probate process to uncover debts, unpaid balances, sums due to specific individuals, and other sensitive details that individuals may wish to keep private. If an estate goes through probate, anyone can look up these records and gain access to the information that the grantor and any beneficiaries might prefer to keep private. A living trust makes it simpler to maintain privacy by bypassing probate entirely.

Provides flexibility

it is not uncommon during the course of an individual's lifetime for financial or personal situations to change. Bearing this in mind, it is also relatively common for grantors to wish to change the terms of the trust and retake control over donated assets -- a process that can be readily facilitated under a living trust. A grantor can change the assets contained within a living trust or even the beneficiaries of the trust whenever they desire to do so during their lifetime with relative ease.

Provides for minors or dependents

Grantors also enjoy the option to tailor the terms of a revocable trust to make sure that loved ones are provided for. For instance, many grantors may have concerns about adult children that are not adept at managing money or many suffer from addiction or chronic illness. A grantor wishing to place conditions on the use or sale of assets contained within the trust can do so as needed. However, a grantor with minor children or a dependent with a disability must also create a separate document, such as a will or guardianship document to appoint a guardian to take care of their minor children or dependents after they die.

Allows for management of assets in case of grantor's disability

Having a trustee in place to handle assets also provides a grantor with a layer of protection should they become disabled and unable to handle their own affairs and the affairs of the trust. If someone is currently healthy but concerned about the future effects of age or declining health, they can name themselves as a trustee while also specifying the name of a co-trustee or successor trustee in the trust document. Doing so allows them to serve as the trustee for the living trust for as long as they are able and then pass over management of the trust to the successor trustee as the situation dictates.

What Does a Living Trust NOT Do?

Though there are many benefits to using a trust, as with all legal decisions, there are some downsides to be considered and limitations to what a living trust can accomplish.

Protect assets from nursing home costs

A living trust does not protect assets from being applied to offset nursing home costs when a grantor is applying for reimbursement through the Medicaid program. These potential costs should be considered as a person ages and their living conditions shift. They should be factored into financial calculations as a person plans their estate strategy.

Get around estate taxes

While a trust can help a person avoid the probate process, this benefit does not extend to estate taxes as well. As long as the grantor retains control of their assets, these trust assets will be considered a taxable part of their estate upon their death.

Avoid making hard decisions

Creating any estate document comes with making hard and serious decisions and trusts are no exception. When making a trust, the grantor must discuss and decide which beneficiaries will receive their properties and other assets, often a tense topic. They will also have to evaluate the people close to them as they decide who to appoint as a trustee or successor trustee, someone trustworthy and capable of managing their delicate financial matters.

Final Takeaways

Living Trusts are a helpful tool and an important part of a comprehensive estate plan for many people. Before beginning to draft living trust documents, it is important to first understand some of the basics about what they are, how they operate, and what can and can not be achieved by using them.

A trust is an estate planning tool that is used to hold the trustor's property and is managed by a trustee for the benefit of a beneficiary

A living trust is a trust created when the trustor is still living with the trustor receiving income from the trust until their death, at which point the assets are transferred to a named beneficiary;
A testamentary trust is a trust created by a will and becomes operative when the testator dies so that the assets are managed by the named trustee and the income from the trust is collected by the named beneficiary until they are able to manage the trust assets themselves.

A trust usually contains real estate properties, stocks, intellectual properties, retirement accounts, and other high-value items.
A living trust can accomplish many things including avoiding probate, maintaining the grantor's privacy, providing for minors or dependents, and taking care of the grantor if they become too incapacitated to manage their own affairs.
Use of a trust does not get around the costs of nursing homes, payment of estate taxes, and the necessity of making difficult decisions.

About the Author: Malissa Durham is a Legal Templates Programmer and Attorney at Wonder.Legal and is based in the U.S.A.