WHAT IS A LIVING TRUST?
You may have heard of “Living Trusts” or “Revocable Trusts” as a means to avoid probate at death. But what are they? How do they work? What is the difference between a Living Trust and a Living Will? Before we answer these questions, let’s start with a more basic question — What is a Trust?
What is a Trust?
Merriam-Webster defines “trust” as a property interest held by one person for the benefit of another. Another way to describe a trust is an arrangement whereby a person (a trustee) holds property as its nominal owner for the good of one or more beneficiaries. The trustee may or may not also be a beneficiary of the trust. The trustee also may or may not be the person who created the trust. The creator of a trust is the “settlor” or “grantor”.
The terms under which the trustee must administer the trust for the benefit of the beneficiaries are set forth in a “trust agreement” or “trust instrument.” Following is a simple example of a trust agreement: “I, John Doe, as grantor, hereby transfer $10,000 to Robert Smith, as trustee, to hold for the benefit of my daughter, Susan Doe, for her educational expenses.” In this example, Susan is the sole beneficiary of the trust and Robert must utilize the trust property (i.e., the $10,000) for Susan’s benefit as provided in the trust agreement created by John.
What is a Living Trust?
A living trust, as the term is used for estate planning and probate avoidance, is typically a revocable trust created by a grantor during the grantor’s life. The grantor is usually the initial trustee and the beneficiary of the living trust during the grantor’s life. The grantor will name one or more successor trustees to take over and administer the living trust in the event the grantor becomes incapacitated or dies.
The grantor will specify in the trust agreement how the trust property will be managed and distributed during the grantor’s life, and also upon the grantor’s death. The grantor will identify beneficiaries to whom remaining trust property will be distributed following the grantor’s death.
How does a Living Trust work?
For a living trust to avoid probate at the grantor’s death, the grantor must actually retitle his assets to his living trust during his life. This process of re-titling assets is referred to as “funding” a living trust, and it a necessary step in completing a living trust-based estate plan.
Once the assets have been titled in the name of the living trust, the trustee, whether the trustee is the grantor or another individual or entity, will follow the terms of the trust agreement as to how the trust must be administered for the benefit of the beneficiaries.
If the grantor becomes incapacitated, meaning he can no longer manage his own financial affairs, the successor trustee (who was chosen and identified by the grantor in the trust agreement) can take over the administration of the living trust for the grantor’s benefit, and will have authority over the trust property without having to become appointed by a court as guardian of the disabled grantor.
Upon the grantor’s death, the successor trustee will follow the provisions in the trust agreement as to the payment of expenses and taxes, and will distribute remaining trust property to the beneficiaries identified in the trust agreement, under the terms set forth in the trust agreement.
What is the Difference between a Living Trust and a Living Will?
A Living Trust, as described above, is an arrangement for the management and use of certain property by one person for the benefit of the beneficiaries who are identified in the trust agreement. A Living Trust is effective both during the grantor’s life and after the grantor’s death.
By contrast, a Living Will is an advance directive in which the person signing the Living Will indicates his or her wishes in the event they become terminally ill, or suffer an irreversible injury, and death would be imminent except for death-delaying procedures. A Living Will sets forth the person’s wishes for end-of-life medical care, and speaks for the person on such matters at a time when they are no longer able to express their wishes. A Living Will does not provide for the management or distribution of property and has no effect after the person’s death.
What Should You Do?
A Living Trust and a Living Will can both be very beneficial and, along with other legal documents, should be considered as part of a complete estate plan. You can start the process of planning for your future and for your family’s future by calling our office to schedule an initial consultation with one of our estate planning attorneys. We look forward to discussing your individual concerns and situation and helping you plan so that your wishes will be carried out.
Should you have any questions about “Living Trusts” or “Living Wills” or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.
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