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A Living Trust is a flexible, powerful and often the best estate planning instrument available. If your assets exceed $150,000, if you own any real estate, if you are married or if you have children, a Revocable Living Trust is often highly recommended. The primary benefit is that your heirs can avoid the time, expense and loss of privacy associated with have one’s estate handled by the Probate Court. The cost of the trust prepared by a trust lawyer is much less than the statutory probate attorney’s fees.
What is a Living Trust?
The Living Trust is a formal, contract like legal document that can work like a Will for testamentary gifts, but offers much more. With most simple and common Living Trusts, assets are put into the Trust owner, sometimes called a trustor, settlor or grantor, and those assets are managed by trustee for the owners own benefit during their lifetime.
Who Creates and Manages the Trust?
The trust is created by the owner of the assets. Most people name themselves as the initial trustee in charge of managing their own living trust’s assets. It is common for the settlor, trustee and beneficiary of a Living Trust to be the same person when it is first created. In other words, you could put your assets in a Living Trust, serve as the trustee, and use the trust assets to pay your personal bills. Often, husband and wife are co-trustee’s. By naming yourself as trustee, you will remain in full control of the assets during your lifetime. Basically, nothing changes in the way you buy, sell and manage your assets, with the exception that the title of those assets should be put into the name of the Living Trust.
Can the Living Trust be Changed?
As long as you have legal mental capacity to make estate planning decisions, you can make any changes you want to the trust including changing any of the beneficiaries, changing the distribution structure of the gifts to the beneficiaries, changing the successor trustees, or any of the terms of the trust, at any time. The change needs to completed by a formal amendment to the trust. You can also entirely revoke the Living Trust at any time, for any reason.
Trustees and Successor Trustees
Usually the creator(s) of the Living Trust is also the initial trustee(s). Who should the successor trustee be? That is your decision. You can name your spouse, partner, an adult child, another relative, a family friend, a business associate or a professional fiduciary such as a bank. A successor trustee will take over as the trustee and manage the trust’s assets if you should ever become unable to do so. Your successor trustee would also take over the management and distribution of your assets when you die. The terms of the Trust become irrevocable when you die.
The trustee does not need any special training because they can always retain professionals to assist them with financial, legal and real estate issues. What is most important is that the successor trustee is organized, prudent, responsible and honest.
While the executor of a Will is subject to direct court supervision and the trustee of a Living Trust is not. A trustee and an executor both serve similar functions and carry the same “fiduciary duty” owed to the trustor and all of the beneficiaries. Both are responsible for ensuring that your written instructions of the Living Trust are followed.
Funding the Trust with Assets
The most critical task after creating a Living Trust is to fund the trust with assets of the owner in a proper and formal manner. The failure to properly fund a trust is the most common problem and often requires going through Probate which is one of the primary reasons one uses as a basis to create a Living Trust.
Funding involves transferring legal title out of one’s individual name to that of the trustee on behalf of the trust. For real estate, a new deed needs to be created, executed and recorded. For many financial assets, the account name needs to similarly be changed.
With a properly created and funded Living Trust, the successor trustee will transfer your assets in accordance with your instructions in the Living Trust without the need for Probate Court involvement. For an individual, or the surviving spouse in a joint trust, the trust becomes irrevocable upon the trustor’s death. The successor trustee has a legal obligation and fiduciary duty to follow the instructions. Probate is lengthy and expensive, so avoiding it is one of the most common reasons people choose to have a Living Trust.
TYPES OF SPECIALIZED TRUSTS
Asset Protection Trust – An Asset Protection Trust is specifically designed and structured to protect one’s personal assets from creditors and lawsuits. There are numerous types of Asset Protection Trusts with various levels of sophistication and probability of success. Asset Protection Trusts can only be used successfully in certain limited circumstances and are often expensive to create and maintain. An Asset Protection Trust can be either domestic or foreign based (offshore trust).
Bypass Trust – A Bypass Trust, also known as a Credit Shelter Trust is a common structure in married couple’s trusts used to ensure that the husband and wife can both use the maximum estate tax exclusion which has been varying from year to year.
Charitable Trust – A charitable trust is used to make a charitable gift, receive a tax deduction, and still continue to benefit from use of the property in the trust. The tax deduction may be an income tax deduction for the taxable year of the gift or an estate tax deduction. There are primarily two types of charitable trusts: 1) a Charitable Remainder Trust, and 2) a Charitable Lead Trust.
Crummey Trust – A Crummey Trust provides a way to make tax-free gifts to one’s selected heirs and have those gifts placed in a special trust that will accumulate for the benefit of the heir until they reach the age permitting access to the money or property.
Disclaimer Trust – A disclaimer is a surviving settlor’s refusal to accept a transfer of property, or a particular right or interest in property, from the deceased settlor. Disclaimers are sometimes used to fine-tune an estate plan after the death of the deceased settlor, thereby saving substantial taxes. This is particularly true if family wealth has significantly increased or if it is determined that the surviving settlor has an unexpectedly short life expectancy. The provisions of a Disclaimer Trust are intended to provide the surviving settlor with increased opportunities to use disclaimers in appropriate cases. The surviving settlor has no obligation whatever to make any disclaimers.
Dynasty Trust – Also known as a Legacy Trust, a Dynasty Trust is primarily used to pass assets to multiple generations of heirs while avoiding or deferring transfer estate taxes each time the trust is passed to the next generation. These trusts utilize extensive and complex structuring to comply with the IRS tax regulations.
Irrevocable Trust – An Irrevocable Trust is designed for limited and specific purposes necessitating that the assets placed in the trust are permanently out of the control of the party placing the asset in the trust. Most of the terms of the Irrevocable Trust cannot be changed, modified or terminated. Generally, an Irrevocable Trust is used to save or defer income or estate taxes, or in some cases, to protect one’s personal assets from creditors.
Life Insurance Trust (LIT) – A Life Insurance Trust is an irrevocable trust set up to ensure that proceeds of one’s life insurance policy are not be included in that person’s estate for estate tax purposes. The Life Insurance Trust directly makes the purchase of the life insurance policy and pays the premium(s). The policy proceeds pass directly to the beneficiary, or contingent beneficiaries designated in the policy, upon the death of the insured.
MediCal Trust – MediCal Trusts are commonly referred to as a vehicle that can be used to protect assets from MediCal. These trusts are irrevocable and are difficult to structure and implement.
Offshore Trust – Offshore or Foreign Trust are generally designed to protect one’s assets from taxes, creditors and lawsuits. Most trusts designed for these purposes are irrevocable and require transferring one’s assets to be managed by a foreign trustee in a foreign country. These trust are the subject of considerable IRS scrutiny.
Qualified Personal Residence Trust (QPRT) – A QPRT trust can help reduce estate taxes and protect the trustor’s home from creditors and lawsuits. There are several variations of this type of trust structure, they are commonly known as: 1) a Grantor Retained Interest Trusts (GRIT,’s), 2) a Qualified Grantor Retained Annuity Trusts (GRAT’s), and 3) a Grantor Retained Unitrust’s (GRUT’s). QPRT’s have excellent Asset Protection qualities for California residences.
Qualified Terminable Interest Property Trust (QTIP) – A QTIP trust is usually used in connection with second marriages and blended families. The QTIP Trust allows one to put assets into a trust that one’s current spouse can receive income and support from. Upon the death of the surviving spouse, the trust assets go to designated benefiaries, such as children from a prior marriage.
Revocable Living Trust – The Revocable Living Trust is the most common type of Living Trust. Its primary benefit is that it avoids Probate Court as compared to Wills, which automatically is subject to Probate Court Jurisdiction. The Revocable Living Trust can be amended or revoked at any time; amendments need to be formally made. There is tremendous flexibility with a Revocable Living Trust. It can be designed with many sub-trusts for minors asset management, special needs, tax structuring and more.
Special Needs Trust – A Special Needs Trust is created to provide a place where assets can be placed to support someone who is receiving government benefits and aide and is disabled or has special needs. The key is that the assets in the trust are not assets considered for Medicaid or SSI purposes. Thus, the government benefits remain in place notwithstanding the receipt of assets from one’s trust estate. There are strict and complex rules for a Special Needs Trust construction.
Spendthrift Trust – A Spendthrift Trust is designed to place assets into a trust so that they can be used to support the beneficiary, but does not allow the beneficiary to control the assets. Accordingly, the assets are not subject to attack or collection by existing or potential creditors of the beneficiary.
Testamentary Trust – A Testamentary Trust is a trust constructed within a Will and comes into existence upon the death of the owner. Since the Will is the controlling document, the testamentary trust is subject to the jurisdiction of the Probate Court.
Trust Administration After Death – After the death of a Settlor, or the death of a surviving Settlor in the case of joint married trust, there begins a straight forward process of Trust Administration. The successor Trustee begins to collect and account for all assets, notify beneficiaries and manage the distribution of Trust assets in accordance with the terms of the Trust. The Trust Administration is managed privately, without judicial supervision or public disclosure. Successor Trustees can retain, if they choose, lawyers and accountants to assist them during the Trust Administration process. Usually, these professionals bill their time on an hourly basis.
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