Perhaps the most misunderstood estate planning vehicle requested by clients is the Living Trust. A Living Trust is a legal document that acts as a substitute for a Will. It is actually a form of personal holding company you create during your lifetime. It is designed to own your assets today while you are living and dispose of your assets following death.
Parties to a Trust
A Living Trust has three parties. The first party is you, the Grantor, the person who creates the trust. In creating the trust, you retain the right to revoke or alter the trust in any way. You do not give up control!
The second party is the Trustee. The Trustee is given the responsibility of managing and distributing the trust assets. In most cases, the Grantor is the initial Trustee of the trust. The Grantor establishes the trust and names himself as the Trustee of his own trust. In some cases, the Grantor may designate a spouse, child, financial advisor or a trust company to manage the trust. Regardless, the Grantor retains control over the trust and its administration. The Trustee’s job is to act as directed by the Grantor.
Should the Grantor become incapacitated and be unable to serve as Trustee or instruct the Trustee to act, the trust document gives the Trustee directions as to the management and distribution of the trust assets. The Trustee is directed to distribute trust assets to or for the benefit of the Grantor to provide for the Grantor’s health, support and reasonable comfort and to support the Grantor in his accustomed manner of living.
The third party to a trust is the beneficiary. Initially the Grantor is the beneficiary of his own trust although provisions may be made within the document to also provide for support of a spouse or children.
Administration at Death
Following the death of the Grantor, the trust often continues for the benefit of the spouse, if surviving. In addition, the trust may continue for the benefit of children and grandchildren. The trust for the benefit of a spouse and children is often structured in a manner designed to minimize estate and inheritance taxes.
Following the death of the Grantor, the trust will often be divided into as many as three separate trust estates. One trust is often referred to as a Family Trust. This is a trust often for the benefit of spouse and/or children. The second trust estate is often referred to as a Tennessee trust. This is a trust solely for the benefit of the spouse. The third trust is often referred to as a Marital Trust. Like the Tennessee trust, it is solely for the benefit of the spouse. All three trusts have different estate and inheritance tax objectives. The trusts are designed to reduce death taxes. The structure of the trusts is governed not only by tax law, but also by the instructions of the Grantor.
Funding the Living Trust
Second only in importance to the terms of the trust instrument is the funding of the trust. If the trust is to achieve one of its principal goals of avoiding probate, virtually all assets of the Grantor, with the exception of retirement related assets, must be transferred into the trust. This requires real property to be deeded into the trust and stocks, bonds and bank accounts to be transferred reflecting the trust as the owner.
The failure to cause all assets of the Grantor to either be owned by or payable to the trust or other beneficiaries results in the trust failing to achieve its goal of avoiding probate at death. If any assets remain in the name of the Grantor at death which are not owned by or payable to the trust or payable directly to a beneficiary, it is necessary to probate the estate of the Grantor and transfer the omitted assets into the trust. This is done utilizing a Will which is referred to as a “Pour Over” Will. It is called a Pour Over Will because the assets that pass through the Will are poured over into the Living Trust.
Advantages of a Living Trust
A Living Trust has multiple advantages as follows:
1. Asset Management. Preparing and funding the trust requires you to review, list and organize your assets. The simple act of listing one’s assets often saves the family many hours of investigating the nature and extent of a deceased family member’s estate.
2. Disability of Grantor. The Living Trust, coupled with a Durable Power of Attorney, provides the best possible vehicle in dealing with assets of the Grantor who becomes disabled or incapacitated. The ability of family to handle assets for a disabled individual is often limited, even with a very complete Power of Attorney. The authority granted to the Trustee of a Revocable Living Trust to manage assets of a disabled Grantor is substantial and gives the best possible opportunity for avoiding a court Conservatorship for a disabled person.
3. Death of Grantor. To the extent that all assets are either owned by or payable to the trust or individual beneficiaries, probate at death is avoided. Probate is a legal process established to deal with the assets of an individual at the time of death. The job of the Probate Court is to make sure that the Will, if there is one, is followed and to also assure that all debts, administration expenses and taxes of the decedent are paid. Because probate is a court proceeding, substantial dollars in court costs, legal fees, accounting fees, etc., may be incurred.
Do not assume that avoiding probate eliminates all problems at death. Debts still must be paid. Some assets may need to be liquidated. Taxes will still be due although a Living Trust may help in reducing death taxes. A Trustee of a Living Trust must perform many of the same duties as the Executor of a Will. The major difference is that these actions can be performed without court oversight in most every case.
4. Tax Savings. Estate and inheritance taxes may be saved. A properly drafted Revocable Living Trust will, in most cases, save estate or inheritance taxes when the assets ultimately pass to children or other beneficiaries. However, it should be noted that the same identical savings can be produced through a properly drafted Will. Saving death taxes is not a benefit that exclusively belongs to a Living Trust.
With Good Comes Bad
No technique which produces such benefits comes without a price. There are a number of negative factors which must be considered before establishing a Revocable Living Trust:
1. Complexity. A Revocable Living Trust is a type of personal holding company. It is structured to allow you, the Grantor, to manage your assets during lifetime, allow a Successor Trustee to manage assets in the event of your disability and to continue to manage and distribute the assets following your death. Accordingly, it is a much more comprehensive and complicated document than a Will by itself.
2. Transfer of Assets. The transfer of assets into a Revocable Living Trust can be a difficult and time consuming process. Re-titling virtually every asset you own will require both time and effort. Despite any negative, it is always easier to re-title assets into the name of a trust while one is alive and can easily sign documents than it is to transfer assets at death when the owner is deceased and cannot sign anything.
3. Revisions. Just like a Will, no estate plan that utilizes a Revocable Living Trust can ever be considered finished. Circumstances change. Assets change. The tax law changes. Beneficiaries or named Successor Trustees become disabled or die. Just like a Will, every Living Trust should be reviewed at least annually to make sure that it still meets the needs of the family.
A properly structured Living Trust allows you to retain control of your assets, maintain the privacy of family financial matters, minimize the stress to your family in the event of your disability or death, and truly provide for your family in your way. A Living Trust will not cure all estate related problems. It will, however, help you protect that which you have worked an entire lifetime to accumulate.
Robert D. Malin