Living Trusts have become enormously popular in recent
years and provide the backbone of many estates, simple
and complex. They provide an alternative to a Will
and have the principal advantage of avoiding probate
on a person's death. There is also a lot of hype and misinformation
surrounding Living Trusts so you should always consult
an attorney when considering preparing and funding a Living
Trust.
How a Living Trust Works
Unlike a Will
which has no legal effect while you are alive and only
becomes operative on your death, a Living Trust is a document
which, when executed, governs property in the trust. Typically,
a single person or a husband and wife together create
a Living Trust. The creators of the trust are known as
the settlors or trustors. Once the trust is created, the
settlors (trustors) "fund" the trust by transferring
title of their assets to the trust. This can be a simple
or complicated process depending on a person's assets.
Bank accounts can be transferred to the trust by having
the bank change the account name. Real property must be
deeded to the trust. Partnership, shareholder, and LLC
membership interests must also be transferred to the trust
by procedures unique to each form of business. Other assets
require other procedures for transfer.
Once the trust is funded, the terms of the trust apply
to all of the property which has been transferred to the
trust. A trust typically provides that the settlors (trustors)
can have full use of the property during their lives and,
on their deaths, the trust will distribute to named beneficiaries
or to other trusts created for custodial or tax purposes.
The person or persons in charge of the trust are the
trustees. Usually the original trustees are the settlors
who created the trust. If the settlors become incapacitated
or die, the trust names successor trustees to take over
the trust who are bound by the terms of the trust. In
this way probate
is avoided on a person's death because property which
is already in the trust simply continues in the trust.
The trust survives the settlor's death. The only thing
that changes on the death of the settlor is the trustee
- like changing the captain of a ship, the ship (trust)
stays intact and the cargo (property in the trust) stays
onboard, the only thing that changes is the person in
charge (new captain.) After the death of the settlor,
the successor trustee distributes the property held by
the trust according to the trust's terms.
Advantages of a Living Trust
• The principal advantage of a Living Trust is
the avoidance of probate which takes time and can be expensive.
• Living Trusts can provide for the management
of person's assets if a person becomes incapacitated,
without the need for a conservatorship.
Some Disadvantages of a Living Trust
• Living Trusts involve more work to set up and
therefore cost more money to prepare. In addition to creating
the trust itself, the property of the settlor must be
transferred to the trust in order to fund it. Depending
on the amount and types of property (real property, business
interests, securities) the transfer costs can be significant.
• Many people find the concept and language of
a Living Trust to be complicated and less straightforward
than that of a Will.
• Living Trusts require maintenance to make sure
that all newly acquired assets and assets offered as security
for loans be properly transferred to and maintained in
the trust.
