Living Trusts: What to Know

In my conversations with clients I often find there is a lot of confusion about what a Living Trust is and how it can benefit someone. Part of my discussion of Living Trusts has to do with the fact that there are benefits to a client both during their life and after their death. This is contrasted with a Will that has no effect at all during a lifetime but has a key role after death to begin the probate process, which helps to confirm the legality of an estate and provides court-supervised transfer of assets to beneficiaries. Probate can be very expensive and can last for a long time. It is also a public process with estate documents filed with the court made available to anyone who wants to see them. Living Trusts are often implemented to avoid these pitfalls of probate as well as provide the lifetime benefits. 

Types of Trusts

There are two main different types of Trusts: Irrevocable and Revocable.  

  • Irrevocable Trusts – Irrevocable Trusts, like its name implies, are permanent, only allowing assets to leave the Trust if all those named in it give express permission, or if otherwise permitted under the Trust document or state law. You may be familiar with some types of these Trusts used for particular purposes such as Medicaid qualification, asset protection, or providing for someone with special needs. This type of Trust has its own tax identification number and must file its own tax returns. 
  • Revocable Living Trusts – Revocable Living Trusts, also like the name implies, allow you to maintain your control of the Trust. Revocable Trusts are private and do not get filed with probate court unless the Trust plan was not complete in that assets that needed to be put into the Trust. This type of Trust usually uses the Social Security Number of one of the Grantors who established the Trust for tax purposes and there is no additional tax liability for having this Trust.

For most of our clients a Revocable Living Trust is what we use for what we call our Peace of Mind Plan. This Trust is a legal document that permits them to hold their assets inside the Trust (we often call it the “Trust bucket” for help in visualization) and if they desire, and are legally able to do so, manage their Trusts for themselves and/or others while they are alive. Only after they die, or after the surviving spouse dies in a joint Trust, does the Trust become a Will substitute and hopefully avoids the probate process. Two key points of a Revocable Living Trust are that you 1) do not lose control of your assets by putting them into the Trust–they remain yours under the terms of the Trust; and 2) you can designate one or more people other than yourself, or a bank or other entity, as your Trustee to handle things for you. A Trustee other than you does not have any ownership rights over your assets, rather they must manage the Trust according to your instructions. After your death the Successor Trustee, who you have the ability to appoint, oversees the administration of the Trust to ensure that bills, expenses, and taxes are paid and that assets are correctly distributed. Remember–you can appoint someone to be a Trustee or you can decide to be a Trustee yourself and just have a backup or two. 

Reasons for a Living Trust

Living Trusts can help to avoid a Will contest since they go into effect once signed, while a Will only goes into effect after a person dies. 

A Living Trust can be of use to assign property to a minor. The trustee will hold the property in the Trust until the child is of age. For example, a grandparent can appoint their child as Trustee of a Trust that benefits the grandchildren which makes distributions according to the plan established by the grandparents that cannot be changed by the Trustee. 

Additionally, a Living Trust is very important should you ever become incapacitated. In such a situation you would not have to worry about having a conservatorship on your assets since you have already appointed a Trustee. 

Do I Need a Will Too?

When someone with a Revocable Living Trust dies the ideal outcome is that all assets that they owned at their death are either in their Trust, payable to their Trust, are jointly owned with someone, or have beneficiary designations that direct the outcome. If it all works as it should there is no need for a probate process. However, sometimes there is property not put into the Living Trust and does not have an alternate way of being distributed. While we consider this a plan failure, there is still a process to move the asset into the Trust. That is through the use of a special kind of Will often called a Pour-Over Will whose sole purpose is to be used in a relatively quick probate process to move an asset (or assets) from the deceased person’s Estate into their Trust. You might think of it as being poured from the Estate into the Trust which is why it has that name.

A Revocable Living Trust can be the foundation of a comprehensive estate plan, or Peace of Mind Plan, that addresses your concerns of incapacity and death and ensuring your property is properly managed and distributed. If you have concerns for some beneficiaries due to age or other circumstances the Trust can be an effective way of making your intentions known and able to be carried out. Other key parts of the Peace of Mind Plan are durable Powers of Attorney for financial matters and health care, and a Living Will or Advance Medical Directive that provides guidance to people your trust in the event that you should become incapacitated and cannot speak for yourself.  

Reilly Law PLC Helps Those in Who Are Interested in Revocable Living Trusts and Developing a Comprehensive Peace of Mind Plan

At Reilly Law PLC, we understand the importance of protecting what should be yours. We will help you to create an estate plan that meets your needs and keeps you protected. To learn more or to schedule a free consultation, contact us today!