A
living trust is a type of trust created for the purpose of holding
ownership to an individual's assets during the person's lifetime and for
distributing those assets after death.
In the United
States it is often used because it may allow assets to be passed to
heirs without going through probate. Avoiding probate may save some
costs (the probate process can charge a fee based on the net worth of
the deceased), time, and maintain privacy (the probate process is
public, while distribution through a trust is not). Living trusts also
can be used in planning for the contingency of incapacity. The Grantor
may be a trustee or co-trustee, with the trust instrument providing that
either trustee alone may act on behalf of the trust. The trust
instrument may also provide that other the co-trustee shall act as sole
trustee if the Grantor becomes incompetent.
Despite the advantages,
there are also some negative aspects to think about when considering an
inter vivos trust. Beneficiaries do not save on estate or state
inheritance taxes. Also, they are expensive to set up, and the expense
is immediate, not after the grantor's death.
A common misunderstanding
regarding living trusts is that they shelter assets from having to pay
the estate tax. This is not correct. However, a married couple having a
living trust can effectively double the estate tax exemption amount (the
amount of net worth above which an estate tax is levied) by setting up
the trust in a certain way.
The
Parties To The Trust
- Grantor
- the person who sets up
the trust; also called the settlor, trustor, or trustmaker.
- Trustee
- this is the person who
will manage the trust assets. This also may be the settlor in a
Revocable Living Trust, since the settlor wants to manage his or her
own property. Revocable Living Trust may also be called a "self
settled trust."
- Successor Trustee
- this is the person who
will manage the trust assets when the Grantor dies or if he becomes
incapacitated. Upon the Grantor’s death, the Successor Trustee
will immediately have the same powers that the Grantor had to buy,
sell, borrow, or transfer the assets inside the trust. Also, the
Successor Trustee has the right to distribute the trust’s assets
according to the Grantor’s instructions in the trust instrument.
The Successor Trustee does not have the legal right to change the
trust. The trust becomes irrevocable upon the Grantor’s death.
However, the Successor Trustee has the right to manage the assets in
the estate, but must do so for the benefit of the remainder
beneficiaries. At the Grantor’s death, the Successor Trustee
automatically takes over, without court order pays any debts,
expenses and taxes that are directed to be paid and then distributes
the property to the trust beneficiaries. Where the trust is to end
on the Grantor’s death, and the trust is merely a means of
avoiding probate, the death beneficiary should ordinarily be named
Successor Trustee.
- Beneficiaries
- the people who will
receive the benefit of the trust’s assets are called
beneficiaries. The grantor is the original beneficiary. Those who
take after the grantor's death are “remainder beneficiaries."
Establishing
a Living Trust
An individual transfers
title of his assets from himself as grantor, to himself as trustee of
the trust, to administer for the benefit of himself. The trust also must
name the remainder beneficiaries who will take after the grantor dies.
The beneficiaries get nothing until that person dies.
It may be advisable to
utilize a corporate trustee such as a bank. A substantial advantage is
that a corporate trustee can act in perpetuity, whereas an individual
cannot. Furthermore, corporate trustees must provide accurate and
detailed records of all transactions that take place in the trust, for
however long the trust exists. Those records become what is known as an
"accounting" of the trust, which may be required to be
provided to a court or remainder beneficiaries. Corporate trustees also
are required to manage the investments held in the trust. However, laws
have been updated in most states to allow a corporate trustee to act in
a "directed capacity", meaning that they are required to have
oversight of the trust investments, but not the day to day management of
them
