A living trust–an intervivos trust if you want to be formal–allows you to put your assets in a trust while you’re still alive. If your living trust is revocable, as almost all are, it gives you great flexibility. You or someone in whom you have confidence manages the property, usually for the benefit of you or your family. Most people name themselves as trustees, and find there is no difference between managing the trust and managing their own property–they have the right to buy, sell, or give property as
before, though the property is in the trust’s name rather than their own. A living trust is one of the two main ways to avoid probate. (The other is joint tenancy or survivorship.) One of the purposes of probate is to determine the disposition of the property you leave at death. Since the trustee of your living trust owns that property, there is no need for probate.
Living trusts have become extremely popular in recent years. Even though they’re a useful, simple, and relatively inexpensive way to plan your estate, they do not magically solve all your problems. For example, as states have simplified their probate procedures, many of the advantages of living trusts have diminished. And though they’re great for some people, you can’t assume they’re great for you. Deciding whether a living trust is right for you depends on the size of your estate, what kinds of assets it contains, and what plans you have for yourself and your family.
HOW DO THEY WORK
Requirements for setting up a living trust vary with each state. In general, you execute a document saying that you’re creating a trust to hold property for the benefit of yourself and your family, or whomever you want it to benefit. Some trust declarations list the major assets (home, investments) that you’re putting in trust; others refer to another document (a schedule) in which you list the exact property that will begin the trust; or you may simply transfer the property to the trustee under the trust agreement. In any case, you can add and subtract property whenever you want. You will have to change the ownership registration on whatever property you put into the trust–deeds, brokerage accounts, bank accounts, etc.–from your own name to the name of the trust (e.g. The John A. Smith Trust). If you make yourself the trustee, you will have to remember to sign yourself in transactions as “John A. Smith, Trustee,” instead of using only your name.
When you put property into a living trust, the trust becomes its owner, which is why you must transfer title to the property from your own name to that of the trust. But you retain the right to use and enjoy the property, and because you do, in the cold eyes of the tax authorities, the property in the trust belongs to you, the grantor, for tax purposes. If you receive income from the assets, you must still report the income from the trust directly on your income tax return. The trust itself often files a separate income tax statement as well, though the IRS doesn’t require one if the grantor and trustee are the same person. It is advisable to apply to the Internal Revenue Service for an employers identification number for the trust. You can make anyone you want the trustee. You can also name an alternative trustee (sometimes known as successor trustee) to take over in the event of the original trustee’s death or incapacity.
In a revocable living trust, you keep the right to manage your property whether you’re the trustee or not, since you have a right to change the terms of the trust, the trustee, and the property in the trust at any time. When you die, your alternative trustee distributes the property according to the terms of the trust. Usually, your alternative trustee is your surviving spouse or an adult child, but you can name a bank or trust company if you are willing to pay their fees. See chapter ten for more. Living trusts can extend long after you die. If you want the trust to benefit your infant grandchildren, for example, you might specify that the trustee make gifts to them as needed until they are fully grown. Living trusts, like wills, give you wide flexibility in distributing your property. For example, the trust agreement could say “at my death, my trustee is to give my car to my son Cain, my coat to my son Jacob” and so on. Your instructions can tell the trustee to continue managing assets for the benefit of someone else, distribute them to any beneficiaries you choose, or perform some combination of these actions. If beneficiaries of your living trust die before you do, the property reverts to you, unless you’ve named other people (contingent beneficiaries) for those gifts.
Unless taxes are a worry–and they won’t be in the vast majority of estates–you should be sure to retain the right to revoke or amend your trust whenever you wish (see chapter nine for more about this). Have your lawyer create a revocable trust agreement, which allows you to change the terms or trustee or just to forget the whole thing if it’s too much trouble. It can be a bother to set up and fund the living trust, but the payoff for your family comes when you die. If Ilda wanted her property to go to her friend, Rick, for example, she would put it in a trust and name him co-trustee or successor trustee. Then, when she dies, he becomes sole trustee, and acting in that capacity, transfers the trust property to the beneficiary–himself. Since the property does not have to go through probate, there’s no break in continuity.
Most states require no witnesses or other legal voodoo to execute the living trust or an amendment to it: just have your lawyer write it–or do it yourself, though that can be risky (see below)–and sign your name. Greater control of assets In some states, a spouse cannot take an elective share in the trust assets (see the discussion of taking against the will in chapter seven), making living trusts a way of disinheriting a spouse in these jurisdictions. Good for far-flung family and assets Say you want your estate administered by someone who doesn’t live in your state (usually a child who’s grown up and moved away). A living trust might be better than a will because the trustee probably won’t have to meet the residency requirements some state laws impose upon executors.
If you have property in another state, many lawyers recommend setting up a living trust to hold the title to that property. This helps you avoid time-consuming, complicated ancillary probate procedures.
While a lawyer isn’t required for setting up a revocable living trust, it’s usually a good idea to
hire one. Though there may be some eventual saving in reduced or eliminated probate costs,
registration fees and other incidental costs of the trust are incurred up front, while the savings
generally don’t accrue until your death.
Not all items may be easily transferred into a trust. Jewelry can be a problem, and
if you transfer title to your car into the trust, you may have trouble getting insurance on it, since you
don’t own it anymore.
The federal estate tax allows an estate to use a year other than a calendar year as
the “taxable year” used in tax deadlines. Trusts don’t receive the same flexibility. If you have a large
estate and timing is a consideration, it might save you money to pass your assets via will instead of
trust. You don’t have to have a separate taxpayer ID number for a living trust, but trusts are
required to make estimated tax payments, while estates are exempt from this requirement for the
first two years. There may be state tax considerations, too: Maryland, for example, charges income
taxes on trusts but not estates. Check your state law for such traps before setting up a living trust.
A trust administration is not an estate administration and you do not have the protection of the claims period nor are you in court with an expedited way for the court to settle disputes over construction of documents or issues of facts regarding status of beneficiaries. If those issues are to be determined by the court in the trust administration, a separate cause of action needs to be filed with a summons, related costs and time delay. In contentious situations, an estate administration is best.