Living Trusts: Frequently Asked Questions and Answers
A living trust is a legal arrangement and set of relationships that permit the passing of property without the necessity of a probate court proceeding.
In a trust, a trustor (also known as a “settlor” or “donor,” depending on where you live) transfers property to a trustee. The trustee or trustees then hold the property for the benefit of the designated beneficiaries.
A specific legal document known as a trust document designates the trustors, trustee(s), and beneficiaries. This document details specific instructions regarding how the trustee is to manage the property and under what circumstances a trustee is to use the property for the benefit of the beneficiaries.
On the surface, trusts seem reasonably straightforward and easy to understand. However, in our litigious world trusts have, by necessity, evolved into a variety of customized, often complex, options designed to provide much more than a simple by-pass of the probate court.
Here are some common questions people ask when considering a living trust.
1. Who needs a trust? Contrary to what some believe, trusts are not an exclusive tool of the rich. Anyway with any assets, including homes, rental properties, automobiles, valuable collectibles, etc. can benefit from having a trust.
2. What is the difference between a revocable trust and an irrevocable trust? Revocable trusts, also called living trusts, are trusts which can be canceled or “revoked” during your lifetime. This type of trust can be changed at any time by the creator of the trust and, unlike a will, does not require that the creator dies for the provisions to be enacted. Conversely, an irrevocable trust does not usually allow the creator to make changes during his or her lifetime. Many lawyers feel this type of trust is better for people who have a lot of assets that need to be protected from risks such as lawsuits, divorce, or creditors.
3. Why are trusts good if one has privacy concerns? One of the biggest advantages of trusts is that, unlike wills, trusts are not part of the public record. Going through probate with a will means that your finances and other issues are exposed to anyone and everyone.
4. Are trusts good for tax planning? Trusts, while not to be used for tax avoidance, do create opportunities to avoid taxation on the part of an estate. A seasoned estate planning attorney can explain to you the different tax strategies involving the use of trusts.
5. Can a trust be challenged like a will? Trusts can, and sometimes are, challenged in court. An improperly constructed trust is open to challenge by anyone with legal standing, such as people who have been in your will previously who are not included in the trust. This is why you probably don’t want to resort to “do-it-yourself” trust kits or websites. Find an attorney who specializes in trusts and wills to assist you in creating a trust that is less likely to be challenged.
6. How do I fund my trust? A trust accomplishes nothing until it is funded. Funding means taking assets titled in the creator’s name or joint names with others, such as spouses, and re-titling them in the name of the trust. Or, in the case of insurance and other financial vehicles which require beneficiary designations, naming the trust as the primary or secondary beneficiary. You can also put things such as your home, vacation property, rental properties, etc. into the trust.
Remember: the goal of funding any trust is to ensure that the trust agreement governs your property. Your trustee can not manage assets held outside the living trust. These assets are also more likely to wind up in probate, and they may not go to the people you intended.
There are many advantages in having a trust, not the least of which is your ability to control your assets both while you are alive and when you pass away. You don’t have to wonder whether or not your beneficiaries will have the things you want them to have since the trust will take over and ensure your wishes are fulfilled.
Trusts can also make your desires and your thought processes apparent to the beneficiaries while you are still alive. This can go a long way toward reducing future family squabbles and litigation.