Wednesday, November 29, 2017

Exactly What is a Living Trust?

Since restarting the blog we have mentioned Trusts as part of estate planning but have not explained what a Trust is, how it works, and the different types of Trusts. Trusts are a useful tool in assembling an estate plan, and one we frequently recommend for a variety of reasons. Most of the time when discussing Trusts we are referring to Living (also known as Revocable) Trusts. In the context of Trusts, the terms “Living” and “Revocable” both mean that the Grantor (Signer) of the Trust may change the terms of the Trust after it is initially executed. We use Living Trusts in estate planning, because a Grantor can amend or restate their Living Trust as needed when the Grantor’s circumstances change. Under most circumstances, a Grantor can change a Living Trust at any time up to their death, at which time it becomes an Irrevocable Trust and the terms cannot be changed (Irrevocable Trusts are different from Living Trusts in many ways but we will discuss those at a later date when we write a blog on Irrevocable Trusts).
A Living Trust is a written document that establishes a legal entity, similar to a Corporation or L.L.C., which owns property on behalf of a person, which is the Grantor while alive and the Trust Beneficiary after the Grantor has died. The person responsible for managing the property the Trust owns is the Trustee. A simple way to look at a Living Trust is to imagine a large empty bucket that Mr. and Mrs. Jones (the Grantors of the Trust) create by signing the Trust document. The document provides that Mr. and Mrs. Jones are the Grantors of the Trust and name themselves as initial Trustees who get to control what goes into the bucket. As Grantors and Trustees they get to transfer assets into and out of the bucket at any time, and as the beneficiaries of the Trust during their lives they get to use the assets in the bucket however they wish. This collection of circumstances means that there is almost no difference between the Joneses owning the property and the Jones Living Trust owning the property. In both cases, the Joneses can do anything they want with the property.
During their lives the Joneses put all of their property in the bucket, including, homes, bank accounts, investments, and other personal property. They can also provide that assets with beneficiary designations, such as insurance policies and retirement accounts, can designate the Trust as the beneficiary. When the Joneses die, the Trust Document provides detailed instructions of how the assets in the bucket are to be administered. The first instruction is a list of people who can pick up the bucket (the Successor Trustees). The Successor Trustees then pick up the bucket and follow the rest of the Joneses instructions regarding how the property in the bucket is to be distributed.
A major advantage of a Living Trust in the context of estate planning is the ease with which a Successor Trustee can take over the management of the Trust. If you recall from our early posts, when a person owns property at their death, that property must pass through the Probate Court before anyone can do anything with the property. This is not true for a Living Trust, because a Living Trust is not a person and the Probate process only affects individuals. Instead, the named Successor Trustee (or Trustees if more than one person is named to act) sign an affidavit know as a Certification of Trust and present proof that the previous Trustees are unable to act (usually in the form of a Death Certificate). With those two documents, the successor Trustees can take over the administration of the Living Trust.
Now the successor Trustees still have a fiduciary duty to act in the best interests of the Beneficiaries, meaning that the Successor Trustee must administer the Trust in the best interest of the Beneficiaries and never for their own advantage. The successor Trustees need to take control of the Trust's assets, prepare an inventory of those assets, provide notice to creditors, pay outstanding bills, and handle tax related matters, all before making distributions to the Beneficiaries. However, unlike with a Will, a successor Trustee does all of these things without the supervision of the Probate Court.
While this improved ease of administration is great in general, it is even better when dealing with minor Beneficiaries or Beneficiaries suffering from a legal incapacity or financial immaturity. In cases such as this, a Trust allows the Trustee and the Guardians named to care for those Beneficiaries to work together to ensure there are sufficient assets available to care for the Beneficiaries without the need to report to the Probate Court on a regular basis. This eliminates much of the cost of administration and retains more assets for the care of the Beneficiaries. The Trust can also be used to distribute assets over time to those Beneficiaries who do not have the financial maturity or discipline to manage the assets themselves.
We hope that this simple explanation of Living Trusts helps you to understand how a Living Trust can fit into an estate plan. There is a great deal of information that we just cannot fit into a blog that is less than 1,000 words so please check back for further explanation on the subject. Also remember, a Trust is a complex legal document and must be drafted correctly to function as intended. It is always best to consult with an attorney experienced in estate planning before attempting to make use of a Trust, because as with most subjects, you can find as much bad information as good information about the supposed benefits and drawbacks of Trusts.

Matt and Al

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