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What is a Living Trust?

A trust is an arrangement whereby property is managed by one person, called "the trustee", for the benefit of another person, called "the beneficiary". The trustee holds legal title to the property, and owes a fiduciary duty to the trustee. The trust is created by the grantor, who entrusts his or her property to the trustee for the benefit of the beneficiary of his or her choice. The grantor does not have to designate someone else to be the trustee, but may choose to be the trustee himself. Because the grantor may revoke the trust at any time, it is often referred to as a "revocable trust."

But what is a "living" trust? Also called an "inter vivos" trust, a living trust is created by the grantor during the grantor's lifetime, rather than upon their death.

Terms and Conditions of a Living Trust

All of the terms of the trust are set out in the trust document itself. This usually takes the form of a deed, called a "Declaration of Trust," and is governed by local law, so be sure to consult the laws of your own state. The trustee has the legal obligation to administer the trust according to the terms of the trust and in compliance with local law. If the trustee does not administer the trust properly, he or she can be held personally liable for certain issues that arise. For example, where the trustee does not properly invest to expand the trust fund, many courts have found that trustee liable for the lost income.

Benefits of a Living Trust

Living trusts are designed to avoid probate proceedings. Probate simply refers to the court-administered process of paying debts and distributing property to heirs upon one's death. This is a very timely and costly process. Heirs can often expect to wait months before receiving anything, and by the time they do, the assets have been diminished significantly by court costs and attorney's fees.

Other common reasons to create a living trust include:

  • reducing taxes;
  • ensuring financial privacy; and
  • regulating the use of assets (in case the owner becomes incapacitated).

Also, all documents that go through probate, including wills, become public record. But since living trusts don't go through probate, they never become a matter of public record.

Probate is the process that courts use when a property owner has not designated who the property should go to after her death. All of the property transferred according to the living trust avoids probate, however. Upon the grantor's death, the trustee transfers ownership of the property to the beneficiary, as designated in the trust document. This usually only takes a few weeks, compared to probate which can take months. There are no lawyer's fees or court costs to pay for settling a trust, so it saves money. Once ownership of all of the property in the trust fund has been transferred to the beneficiary per the terms of the trust document, the trust ceases to exist.

Cost of Creating a Living Trust

Like a will, a trust is not too complicated for a person to create without a lawyer. There are many self-help books providing living trust information and computer programs that walk people through how to create a Declaration of Trust — the document that creates the trust. Of course, it is always a good idea to consult an attorney regarding questions that may arise.

There may be filing fees for filing the living trust or for transferring property deeds into a trust, but because no court proceedings are involved, like in probate, court costs are avoided. These filing fees vary per state, so be sure to check your own state's filing fees. Some states, like California, even vary the amount of the fee based on how large the estate is.

The trustee is entitled to compensation for any work done to administer the living trust, and may legally take any reasonable amount from the trust fund. The trustee does have the option of waiving this fee.

Maintenance Requirements of Living Trusts

There is quite a bit of paperwork involved. After the initial creation of the Declaration of Trust, the grantor must create and sign new deeds each time she adds an asset to the trust. For example, if the grantor decides to leave her own house to a beneficiary in the trust, the grantor must sign a deed, specifying that she owns the house as trustee of her living trust. This paperwork may seem burdensome; however, the process is much more efficient today because living trusts have grown to be so common.

Creditors and Property Named in a Living Trust

Both during life and after the grantor's death, all assets held in the living trust are subject to lawful debts. For example, if your home is held in trust and passes to your children at your death, a creditor could demand that your children pay the debt up to the value of the home. Because of title laws, real estate ownership is always a matter of public record. This is the way in which creditors can find who inherited the real estate. Tracking down these heirs is more difficult in a trust verses a will, because a will is automatically a matter of public record. When the real estate passes to heirs via a living trust, however, the creditor must go through the process of title searching, which can be a long, tedious process and may not be worth the creditor's time.

Probate can protect heirs from creditors who fail to file claims within the given window of time, though. During probate, known creditors must be notified of the debtor's death. Once notified, those creditors have a deadline before which to file against the assets. If they miss the deadline, all of their claims cease to exist.

The Importance of Also Having a Last Will and Testament

A will often contains a clause that names the recipient of all property not specifically left to a beneficiary. For example, if someone obtains ownership of a car shortly before death, and does not include the car in his last will and testament, that person may not have had the title of the car transferred to his trust, either. If he did not have a will, that car would fall to probate. However, if he had a will containing the above-mentioned clause, the car would go to the recipient named in the will.

Some jurisdictions recognize what is called a "pour-over will." This is a type of decree that orders all of the grantor's property to "pour" into her trust, at the time of her death. That way, all of her assets would be distributed to the beneficiaries named in the trust, and none of her assets would fall into probate. Not all states recognize this; so, be sure to check your state's laws.

Without a last will and testament, any property that is not transferred by a living trust will be distributed to the closest relatives. This distribution will be determined by the courts according to state law. Each state has devised distribution laws, according to how a reasonable person would want their assets distributed. Even so, courts may not distribute your property the way you would want. It is best to create a will to specify how you want your property distributed after your death.

Living Trust and Estate Taxes

Some living wills can lower your estate taxes. A simple living trust does not affect taxes, but more complicated living trusts -- which include numerous valuable assets -- can substantially reduce estate taxes.

An AB trust (also referred to as "credit shelter trust", "exemption trust," "marital life estate trust," and "marital bypass trust") is designed specifically for married couples with children. Each spouse leaves the other spouse property in trust, for life, and then to the children. For example, if Husband and Wife create an AB trust, and Husband dies, Wife receives all of the property of the trust. Then, when Wife dies, her interest in all of that property passes to their children. This AB trust can potentially save up to hundreds of thousands of dollars in estate taxes.

Contact an Attorney for More Living Trust Information

Although creating a living trust may require more paperwork than just allowing your assets to go through probate, living trusts can save your estate substantial money and time at your death. If you're still wondering "what is a living trust?" or would like help setting one up, you should contact a skilled estate planning attorney near you.

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