A trust is a legal arrangement where a person, or trustee, manages property for the benefit of another person, or the beneficiary. The legal property title is held by the trustee. The grantor creates the trust and entrusts his or her assets to the trustee for his or her choice of the beneficiary. The grantor, himself, can choose to be the trustee instead of assigning someone else the role. When the grantor can revoke the trust whenever he pleases, it is called a revocable trust.
When the grantor establishes a trust that is enacted during his lifetime instead of at his death, it is called a living trust.
Terms and Conditions of Living Trust
The trust document sets out all the terms of the trust. This deed, also known as a Declaration of Trust, is a legal document that is governed by local laws. Because of this, it is important to review your state’s laws before creating a trust. The appointed trustee is legally bound to follow the trust as laid out in the trust’s terms and comply with the local laws. A trustee can be held liable if they do not administer the trust properly or if certain conditions arise from it. There have been many cases where a trustee doesn’t properly invest to grow the trust fund and they are held liable for the income that was lost.
Reasons to Create a Living Trust
Most people create a living trust so they can avoid probate proceedings. When assets go through probate, the court determines how debts are paid and property is distributed to heirs when someone dies. This process is both costly and timely. Oftentimes, the court proceedings can last for months and will significantly diminish the assets because of attorney fees and court costs.
Another reason to use a living trust is to reduce taxes, ensure privacy of finances, and to regulate how assets are used if the owner is incapacitated.
Download Free PDF Guide On The Probate Process
When a property owner has not assigned their property to an heir after their death, the courts go through the process of probate to assign the assets. When there is a living trust, the transferred property avoids probate. The ownership is automatically transferred to the trustee when the grantor dies as designated by the trust papers. This will typically take only a matter of weeks, unlike probate that will normally go on for months. A living trust also saves money since there are no court or lawyer fees to pay. After the assets have transferred to the beneficiary through following the terms written out in the trust, the trust will no longer exist.
Costs of Creating a Living Trust
Most anyone can create a trust without the help of a lawyer, though that isn’t usually recommended. There are many books that help provide the information you need to create your living trust. There are also computer programs that can walk you through the process of creating the document for the trust, known as the Declaration of Trust. Of course, the best route is to use the expertise of an attorney, especially if any questions or concerns arise, but that is not always necessary.
Very likely, you will have some upfront costs with the trust, such as title transfer fees for vehicles, or recording fees for real estate deeds. You are still saving a lot of money, though, since you will be avoiding court costs. The filing fees will vary depending on the state in which you reside, so you will need to check the fees for your own state. Some states have a sliding scale that is used to determine the fees based on the size of the estate.
When the trustee works to administer the living trust, they are entitled to some compensation and can take a reasonable fee from the trust fund legally.
The Work Behind a Living Trust
When you first start creating your living trust, there is a lot of paperwork to fill out. Once your Declaration of Trust is created, the grantor must sign new deeds if and when they add more assets to the trust. Though the paperwork may seem extensive in the creation process, it has become much more efficient these days, thanks to the popularity living trusts have gained.
The work put into a trust is well worth it, though. Not only does it save a lot of money from avoiding probate, but it stays private. When documents go through probate, they become public record. This includes wills. Since a living trust isn’t required to go through probate, it is not a matter of public record.
A Last Will and Testament and a Living Trust
Many people wonder if they need a will if they already have a living trust. The answer is yes. Any property not left to the beneficiary of the trust will be controlled by the will. You will either need to direct what to do with that property, or direct that it be made part of the trust.
A pour-over Will is usually the best way to handle property you fail to put in a trust. This decree states that all property from the grantor will pour into the trust at the grantor’s death. This means that all the assets not already in the trust will go through probate, but will eventually end up in the trust.
If there is no last will and testament, anything that is not listed in the living trust will go to relatives through probate using the laws of intestacy. Instead of taking a chance on this, it is best to create a will to ensure your assets go where you want them to.
A Living Trust and Estate Taxes
Some living trusts can help to reduce the estate taxes. If you have a simple living trust, your estate taxes will not be affected at all. The more complicated living trusts can help to greatly reduce the estate taxes, though, especially if there are many valuable assets.
An AB trust is an example of a trust that saves on estate taxes. This trust is also known as a life estate trust, marital bypass trust, exemption trust, and credit shelter trust. It is specifically designed for married couples and their children. The trust lists each spouse as the beneficiary for life, then the children once both parents die. For example, a husband and wife form an AB trust. The wife dies, leaving the property from the trust to the husband. Once the husband dies, all the property will pass to the children. This can save thousands of dollars in estate taxes.
Creating a living trust is well worth the time and hassle of the paperwork it requires. It can save your beneficiaries a substantial amount of time and money at your death. It will also ensure that your assets will be distributed how you see fit after you are gone. To find out more about living trusts, contact your attorney.