What is a Living Trust?

Living Trusts

Living trusts are legal arrangements that are outlined in a legal document called a “trust document.” A living trust is established by an individual, called the “grantor”, during his/her lifetime so the assets owned are protected. Upon the grantor’s death, the trust’s assets are distributed according to the instructions outlined in the trust document.

An Estate Planning Tool

A living trust is an estate planning tool that can help family members and beneficiaries avoid a lengthy, public, and sometimes costly, probate process. Avoiding probate is a benefit when you don’t want your estate made open to the public as a public record.

A Legal Document

Living trusts take the form of legal documents called a “trust agreement.” A living trust agreement outlines in detail the terms of the trust and the assets that the grantor assigns to it. The grantor designates a trustee and successor trustee to be the person (or entity) who, at a certain point, controls the assets to benefit the beneficiaries. If the trustee has died or becomes incapacitated during his/her tenure, a successor trustee who is named in the trust document takes over responsibilities. The exact responsibilities of a successor trustee vary depending on the instructions left by the creator of the trust.

Either Revocable or Irrevocable

A living trust can be either revocable or irrevocable, which differ in terms of tax treatment (e.g., estate tax) and flexibility. A revocable living trust can be changed, amended, and terminated during the grantor’s lifetime. An irrevocable living trust cannot be changed in any way.

A Living Trust is Different from a Will

Living trusts are different from wills. A living trust bypasses the probate process while a will does not. The trust is a legal arrangement that enables the individual who created it to maintain control of assets, decrease a taxable estate, limit or avoid estate taxes, and avoid the probate process. Unlike a will, a living trust takes effect while the grantor is living and does not have to go through the probate process or a probate court for the assets to reach the intended beneficiaries. With a very straightforward estate, a will may be sufficient.

It’s important to note that it can be useful to have both a living trust and a will since they perform different functions. Because a living trust goes into effect as soon as it’s created and is funded with the assets it holds while a person is alive and a will goes into effect when a person passes away, a person may want to have both.

Estate Planning Legal Representative

If you create a living trust, you more than likely will want to hire an estate lawyer. An estate planning attorney knows how to advise someone on the most appropriate type of trust for their estate situation. Additionally, an estate lawyer will help oversee the terms of the trust and the distribution of assets.

How a Living Trust Works

A living trust allows a trustee to manage the assets in the trust and then transfer those assets to beneficiaries after the grantor’s death. The trust is a legal instrument that is established during the grantor’s lifetime. There is a legal document that lays out the rules and provisions of the trust in detail. The document can be complex depending on the estate; therefore, the person(s) arranging the trust usually works with an experienced estate planning attorney to ensure the trust is properly set up.

When the Trust is Created

After the living trust is established, the grantor decides which assets will be held in it and then transfers the titles of those assets to the trust.

When the Grantor Dies

When the grantor dies, the assets flow to the beneficiaries according to the grantor’s wishes that are outlined in the trust document.

Beneficiaries

Anyone can have a beneficiary designation for the assets in the trust, even the living trust itself. This means that the living trust is named the beneficiary for certain assets that would otherwise flow directly to a named beneficiary. This supersedes what may be stated in a will.

The Trustee

A trustee is named to manage the assets held in the trust. This person has a fiduciary duty to manage the trust prudently and in the best interests of the beneficiaries. The grantor designates the beneficiaries when he/she creates the living trust. If the trustee dies or becomes incapacitated during their time in that position of responsibility, most trusts also name successor trustees to take over. The responsibilities of the successor trustee may vary from those of the trustee, according to how they are detailed in the trust document.

The Assets in Living Trusts

Assets that are named to be held in a living trust must be assigned to the trust, meaning that they are re-titled to indicate ownership by the trust.

The types of assets that can be assigned to a trust include real estate (land, commercial property, homes), financial accounts, and personal property such as jewelry, artwork, and antiques. Specific financial accounts and items can include:

• Stock and bond certificates and safety deposit boxes
• Mutual fund accounts, brokerage accounts
• Money market accounts, certificates of deposits
• Checking and savings accounts, cash
• Life insurance policies
• Non-qualified annuities
• Money owed to the grantor

Retirement accounts such as a 401(k) or an IRA do not go into a living trust. The IRS sees a change of ownership (from you to the trust) as a taxable event, early withdrawal, and you would owe taxes on the amount in your account in the year that the re-assignment takes place.

Types of Living Trusts

There are two types of living trusts: revocable and irrevocable.

Revocable Living Trusts

Revocable living trusts are the most common type of living trust. Revocable trusts are trusts where the grantor can maintain control over the assets that are placed within it. When the trust is created, the grantor can designate themself as the trustee and they have the authority to change and amend the trust rules at any time. The grantor can change beneficiary designations, change the trustee, remove assets, or terminate the trust.

Revocable living trusts are commonly used to protect the grantor’s assets if he/she becomes ill or is otherwise unable to control the assets. In this situation, a trustee or successor trustee takes over making the decisions for the grantor and the trust. Often, a revocable living trust becomes irrevocable upon the grantor’s death.

Taxes owed on assets in a living revocable trust are paid by the grantor while living. Tax rates, however, do not increase simply because the assets are placed in the trust.

Benefits of Revocable Trusts

The primary benefit of a revocable trust, for which it is commonly used, is to avoid the probate process and to protect the privacy of the trust owner and beneficiaries of the trust as well as minimize estate taxes.

Irrevocable Living Trusts

An irrevocable living trust owns the assets itself; the grantor cannot designate themself as the trustee. This means that the grantor lets go of the rights to control the trust and the trustee effectively becomes the legal owner. The grantor will lose control of managing the trust’s assets.

When an irrevocable living trust is created, the named beneficiaries are set and the grantor can do very little to change that agreement. Trust provisions can only be changed in very specific situations. Changes may require the approval of the courts. Additionally, a grantor can never take back the assets assigned to an irrevocable trust.

Benefits of Irrevocable Living Trusts

An irrevocable trust protects the assets within it from lawsuits and creditors. To transfer assets into an irrevocable trust can be advantageous for certain business owners and professionals who may be vulnerable to litigation, such as doctors or attorneys. This is extremely helpful in business interests.

Another benefit is the grantor can reduce their taxable estate because the trust owns the assets, not the person. In addition, the assets are not included when looking at eligibility for government programs such as Medicare and Medicaid.

Again, as with other trusts, an irrevocable trust keeps assets out of the public probate process so that the information is not a public record.

Advantages and Disadvantages of a Living Trust

In this article, we have established that a living trust is a powerful estate planning tool that makes it possible to avoid probate, retain control and protect assets while you are living, and carry out your wishes for asset distribution. It can make matters easier for your family after your death. You can have a complete estate plan with a living trust, keeping your estate private. Let’s look at both the advantages and disadvantages of a living trust.

Advantages

• Living trusts offer peace of mind to grantors because loved ones can avoid probate when settling the estate.
• Distributing assets occurs smoothly and quickly without court costs.
• If you become incapacitated and can’t manage the assets held in the trust yourself, you have a trustee (not assigned by the courts) who will manage them on your behalf.
• The tax rate doesn’t increase simply because the assets are in the trust, though you continue to pay taxes related to the assets in a revocable living trust.
• Living trusts keep information about your estate private by keeping it out of the public record when you avoid probate.
• Living trusts can protect your estate from creditors and legal issues.

Disadvantages

• The grantor relinquishes ownership of and control over the trust’s assets in an irrevocable living trust.
• All assets to which the grantor owns the title, such as real estate, must be transferred with a legal change of ownership of the title.
• Transferring titles so that assets become trust assets involves filing fees to register title changes.
• Putting assets into the trust is time-consuming.
• Creating a living trust may require the assistance of an estate lawyer which incurs costs in legal fees.
• Revocable living trusts can be expensive to create and manage, don’t have direct tax benefits, and don’t protect against creditors.
• Only an irrevocable living trust offers tax advantages by reducing the size of the grantor’s taxable estate. A revocable trust still requires taxes (federal, state, and estate taxes) to be paid on the income generated by the assets and on property.

Creating a Living Trust

Generally, these are the steps you take to create a living trust.

1. Decide on the type of living trust you need–either revocable or irrevocable.
2. Choose and designate beneficiaries and the distribution percentages.
3. Name a trustee who has agreed to administer your living trust after you are deceased.
4. Complete the living trust document and review it with your estate lawyer.
5. Sign the document in the presence of a notary public.
6. Fund the trust with the assets you want in it.
7. Keep the original living trust document stored safely in a fireproof lockbox or safety deposit box at a bank. Your estate lawyer will also have a copy.
8. Let the trustee know where the legal document is located and how to access it when necessary.

Living Will

A living will is not the same as a living trust. It is a directive written by you to grant power of attorney and other rights to a trusted individual if you can’t make decisions due to incapacitation or loss of your ability to communicate. A living will is often drawn up as part of the estate planning process.

How Much Does a Living Trust Cost?

Usually drawing up a living trust requires an estate lawyer. Legal fees vary based on location and from law firm to law firm. Costs can be up to several thousand dollars. Irrevocable trusts can cost more to establish because of added complexity.

What Are Estate Taxes?

Estate taxes apply to tax that is due based on an estate’s worth. Estate taxes are assessed on the estate’s fair market value at the time of death. Anything in the estate that is bequeathed to a surviving spouse is not included in the total amount and isn’t subject to pay estate taxes. When the surviving spouse who inherited the estate dies, the beneficiaries may owe estate taxes if the estate exceeds the exclusion limit. Other deductions, including charitable donations or any debts or fees that come with the estate, are also not included in the final calculation.

If you want to protect your beneficiaries from having to pay estate taxes and avoid federal estate taxes, a Charitable Remainder Trust (CRT) is commonly used for this. CRTs are often used for highly appreciated assets because they help circumvent capital gains taxes as well as estate taxes. These trusts can be good choices for real estate, stocks, mutual funds, or other assets that have been in a portfolio for a long time. The ability to transfer property that has appreciated into a CRT and name a charity to benefit from this asset is advantageous to the grantor’s estate.

What Other Taxes Are Due from Inheritance?

An inheritance tax is a tax imposed on the recipients of inherited assets. In contrast to an estate tax, this type of tax is paid by the recipient of a bequest rather than the estate of the deceased. It is a levy on assets inherited from a deceased person received by the beneficiary and paid by the beneficiary. There is no federal inheritance tax. Any tax of this nature depends on the amount of the inheritance and the beneficiary’s relationship to the deceased.

When a beneficiary inherits assets from a trust, he/she must pay taxes on income and other distributions from the trust. Trust beneficiaries don’t have to pay taxes on returned principal from the trust’s assets. Funds received from a trust are subject to different taxation than funds from ordinary investment accounts. Typically, beneficiaries of a trust pay taxes on the distributions they receive from a trust’s income rather than the trust paying the tax.

Contact Living Trust Attorney

At Estate Law Center USA, we have been creating wills and trusts for over 20 years. Or estate planning experts can guide you through whatever issues may lie between your estate and your loved ones in the event you pass. If you still have questions, feel free to attend one of our online estate planning webinars or one of our in-person estate planning workshops located in Alpharetta, Georgia. They are completely free and open to the public. There you can answer questions and get professional insight on how to approach your estate planning journey. Give us a call at 770-212-2181 today.