But What is This Thing Called a Living Trust?
A living trust, like a will, enables you to direct what happens to your property upon your death. But a living trust gives you more flexibility over your affairs while living as well.
And, like a will, a living trust may be altered (i.e., "amended") or revoked, at any time prior to your death.
Note: The same tax planning devices are available whether you use a will or a living trust and thus the choice between a living trust and a will should not be made on the basis of tax considerations.
Background
The idea of the trust is basically to enlist the aid of someone you trust to look after your property according to your wishes when you may not be around to do so yourself.
Story has it that the original trust was created by a soldier in ancient Greece, who, about to go off to war, entrusted all the property he was leaving behind to a friend to look out for while he was away.
The common method of transferring title at death is through court approval of a will and court-directed distribution of property as required by the will. However, not all property changes hands at death through a will and the probate process: Insurance, individual retirement accounts, pension plans and other employee benefits may pass to living persons by virtue of beneficiary designations--not by will and probate. Likewise, property held in joint tenancy (i.e., by two or more owners) passes either to the surviving joint tenant or to the estate of the deceased joint tenant without the need for probate. Property may also pass to a surviving spouse through an expedited, simplified court procedure without probate formalities. Probate may also be avoided by transferring property to a trust which, like the will, also directs the transfer of property upon death.
Glossary
A “power of attorney” gives a person the power to appoint another to act on their behalf. The person making the appointment is called the “principal,” and the one receiving the appointment is referred to as the “attorney” In terms of transactions, the attorney acts as a substitute for the principal and for the principal’s benefit In acting on behalf of the principal, the attorney may deposit money into, or withdraw it from, a bank or other kind of account or sign a contract in the name of the principal. This power is granted by the attorney, who must be mentally competent at the time it is granted, and it ceases at any time the attorney is incompetent.
A "durable power of attorney," on the other hand, continues even once the principle become incompetent.
A general power of attorney gives the attorney full authority to act on any matter, while a limited power of attorney, as the term implies, limits the attorney’s authority to specific acts.
A "conservatorship" involves someone appointed to take over and protect the interests of an incompetent, which is created by the court when a principal has lost the capacity to make such a determination him-or herself.
A “will”, simply put, is an instrument in which a person creating the will, called the "testator," directs the distribution of any property remaining after the testator’s death and the assumption of responsibility for the care of any surviving dependants. The person to whom these responsibilities are given is referred to as an "executor."
A "Testator" is the person who establishes the will, also called a "testament."
A “trust”, simply put, is like a contract between two or more people. Like the will, it lays out how property is to be managed and disposed of.
The person who creates a trust is called a "trustor" or "grantor." This person is like a "testator" in a will. The grantor selects and appoints a person, called a "trustee," to receive the trust property and manage it. As in the will, the property itself is referred as the grantor's "estate."
There are generally, two kinds of trusts: a "revocable" trust and an "irrevocable" trust. "Revocable" means that the grantor, while living, may change his or her mind about what the trust provides for; or, if that person so chooses, the trust may be revoked, or canceled. "Irrevocable" means that once the trust has been established, it can normally not be changed or canceled. Only a living trust can be revocable. A living trust is sometimes also referred to as being "inter vivos," a Latin phrase meaning "between living persons" and indicating that the trust is both established by a living person and managed by that person during his or her lifetime; so that in a living trust, the trustor, while living, is also the trustee.
Every living trust should be accompanied by a "pour-over will," a simple will that is also needed to "pour over" into the trust any property which is not transferred to the trust during life. It is a sort of safety net having the purpose of covering anything the grantor may have failed to provide for in the trust.
"Contesr" means to challenge, as in to context a will or a trust in court.
Upon the death of the grantor, the trust property (including property added to the trust by the will) passes to individuals or charity, either outright or in trust, as directed by the terms of your living trust.
What to Consider When Choosing Between a Will and a Living Trust
Continuity of Management at Death
A living trust provides for the continuing management of property upon either the death or disability of the trustor and generally allows property to be more quickly distributed upon the trustor's death. This is because a trustee or successor trustee can act almost immediately without the necessity of notice or court approval. With a probate estate, several weeks--more often, months-- may pass before court appointment of an executor who is authorized to deal with income and expenses of the estate.
Avoidance of Conservatorship
A living trust also protects against non-management or mismanagement of assets during physical or mental incapacity. If you become incompetent, a trustee can take over management of the trust without a court proceeding and without interruption. A "durable power of attorney" may also be used to avoid a court proceeding for mental incapacity but does not have the flexibility of a living trust for this purpose.
Avoidance of Probate
Establishing a living trust to avoid probate usually reduces attorneys' fees, although it is impossible to estimate accurately the savings to your heirs. Probate attorneys' fees are in some cases based on a statutory fee schedule and, depending on the size of the estate, may amount to some small percentage of the estate. These fees are based only on the value of assets passing through probate (not on insurance, employee benefits, joint tenancy assets and a surviving spouse's interest in community property, in a state that recognizes community property). However, even if all of your assets have been placed in a living trust and probate is completely avoided, an attorney and an accountant are usually required to assist with distribution of the trust assets upon death and to prepare death tax returns. They are usually paid by the hour and the cost of such services will depend on the billing rate and the number of hours expended. (Attorneys' and accountants' fees incurred after death are generally tax deductible, whether or not probate is avoided, so the actual savings to your heirs through use of a trust should be calculated on an after- tax basis.)
A cost comparison of trustee and executor fees must also consider whether family members are appointed to act in these capacities. If a bank is appointed as trustee or executor, the comparison becomes more complex since a bank acting as trustee may charge a fee not only after death but also before death if it acts at both times.
Since probate involves notices, court supervision and review, and waiting periods, more time is required to distribute assets from a probate estate than from a living trust. Probate laws have changed significantly in the last few years, however, and the trend has been to remove from the court process much of the routine administration of an estate. Also, the main reason for delay in the distribution of assets after death may involve the filing of the death tax returns and payment of death taxes--not the probate process. The timetable for calculating and paying death taxes is not affected by whether you use a will or a living trust.
Probate records are open to the public; a living trust is not. This may be an important factor to consider in choosing a trust or a will where privacy is a matter of concern.
There are other alternatives to probate, including summary proceedings for small estates (less than a certain value in assets) and for property passing outright to the surviving spouse (or to certain other surviving family members by what are called a states "laws of descent and distribution.") These alternatives are generally inexpensive and efficient and therefore should be considered in appropriate circumstances.
Cost and Complexity of a Living Trust
Using a living trust to carry out your estate plan may require many changes during your lifetime: stocks must be re-registered, trust accounts must be established and title to loan interests, real estate, partnership and other business interests, and all other assets for which you wish to avoid probate must be transferred into the name of the trustee of the trust. Decisions must be made as to which assets are community property and which are separate property (where applicable). This process is called "funding the trust" and requires some time, effort and expense. After funding is completed, it should only be occasionally necessary to consult an attorney with respect to operation of the trust. The cost of operating a living trust during life will exceed the lifetime cost of using a will, but the cost and nuisance should be relatively minor. (No change in lifetime management is involved with a will since it does not become effective until death). Transfers of assets into the trust, questions regarding trustee authority and powers and the difficulty of amending a trust as compared to a will may contribute to the increased lifetime costs of a living trust. These lifetime costs will hopefully be balanced by a savings in fees at death.
Summary
Whether to use a will or a living trust (with a "pour-over" will) to implement your estate plan is not a simple choice. The decision should be made in light of your assets and your estate plan. Out-of-state property, the possibility of a contest after death, the size of your probate estate, the complexity of your business affairs, your situation with creditors or potential creditors and other factors unique to you must be considered in making your choice. In effect, the living trust causes you to do now some of the things which might otherwise await the probate process at your death. This can either give you the satisfaction of knowing you are beginning to "put your house in order" or it can be an unnecessary nuisance.
Note: The same tax planning devices are available whether you use a will or a living trust and thus the choice between a living trust and a will should not be made on the basis of tax considerations.
And, like a will, a living trust may be altered (i.e., "amended") or revoked, at any time prior to your death.
Note: The same tax planning devices are available whether you use a will or a living trust and thus the choice between a living trust and a will should not be made on the basis of tax considerations.
Background
The idea of the trust is basically to enlist the aid of someone you trust to look after your property according to your wishes when you may not be around to do so yourself.
Story has it that the original trust was created by a soldier in ancient Greece, who, about to go off to war, entrusted all the property he was leaving behind to a friend to look out for while he was away.
The common method of transferring title at death is through court approval of a will and court-directed distribution of property as required by the will. However, not all property changes hands at death through a will and the probate process: Insurance, individual retirement accounts, pension plans and other employee benefits may pass to living persons by virtue of beneficiary designations--not by will and probate. Likewise, property held in joint tenancy (i.e., by two or more owners) passes either to the surviving joint tenant or to the estate of the deceased joint tenant without the need for probate. Property may also pass to a surviving spouse through an expedited, simplified court procedure without probate formalities. Probate may also be avoided by transferring property to a trust which, like the will, also directs the transfer of property upon death.
Glossary
A “power of attorney” gives a person the power to appoint another to act on their behalf. The person making the appointment is called the “principal,” and the one receiving the appointment is referred to as the “attorney” In terms of transactions, the attorney acts as a substitute for the principal and for the principal’s benefit In acting on behalf of the principal, the attorney may deposit money into, or withdraw it from, a bank or other kind of account or sign a contract in the name of the principal. This power is granted by the attorney, who must be mentally competent at the time it is granted, and it ceases at any time the attorney is incompetent.
A "durable power of attorney," on the other hand, continues even once the principle become incompetent.
A general power of attorney gives the attorney full authority to act on any matter, while a limited power of attorney, as the term implies, limits the attorney’s authority to specific acts.
A "conservatorship" involves someone appointed to take over and protect the interests of an incompetent, which is created by the court when a principal has lost the capacity to make such a determination him-or herself.
A “will”, simply put, is an instrument in which a person creating the will, called the "testator," directs the distribution of any property remaining after the testator’s death and the assumption of responsibility for the care of any surviving dependants. The person to whom these responsibilities are given is referred to as an "executor."
A "Testator" is the person who establishes the will, also called a "testament."
A “trust”, simply put, is like a contract between two or more people. Like the will, it lays out how property is to be managed and disposed of.
The person who creates a trust is called a "trustor" or "grantor." This person is like a "testator" in a will. The grantor selects and appoints a person, called a "trustee," to receive the trust property and manage it. As in the will, the property itself is referred as the grantor's "estate."
There are generally, two kinds of trusts: a "revocable" trust and an "irrevocable" trust. "Revocable" means that the grantor, while living, may change his or her mind about what the trust provides for; or, if that person so chooses, the trust may be revoked, or canceled. "Irrevocable" means that once the trust has been established, it can normally not be changed or canceled. Only a living trust can be revocable. A living trust is sometimes also referred to as being "inter vivos," a Latin phrase meaning "between living persons" and indicating that the trust is both established by a living person and managed by that person during his or her lifetime; so that in a living trust, the trustor, while living, is also the trustee.
Every living trust should be accompanied by a "pour-over will," a simple will that is also needed to "pour over" into the trust any property which is not transferred to the trust during life. It is a sort of safety net having the purpose of covering anything the grantor may have failed to provide for in the trust.
"Contesr" means to challenge, as in to context a will or a trust in court.
Upon the death of the grantor, the trust property (including property added to the trust by the will) passes to individuals or charity, either outright or in trust, as directed by the terms of your living trust.
What to Consider When Choosing Between a Will and a Living Trust
Continuity of Management at Death
A living trust provides for the continuing management of property upon either the death or disability of the trustor and generally allows property to be more quickly distributed upon the trustor's death. This is because a trustee or successor trustee can act almost immediately without the necessity of notice or court approval. With a probate estate, several weeks--more often, months-- may pass before court appointment of an executor who is authorized to deal with income and expenses of the estate.
Avoidance of Conservatorship
A living trust also protects against non-management or mismanagement of assets during physical or mental incapacity. If you become incompetent, a trustee can take over management of the trust without a court proceeding and without interruption. A "durable power of attorney" may also be used to avoid a court proceeding for mental incapacity but does not have the flexibility of a living trust for this purpose.
Avoidance of Probate
Establishing a living trust to avoid probate usually reduces attorneys' fees, although it is impossible to estimate accurately the savings to your heirs. Probate attorneys' fees are in some cases based on a statutory fee schedule and, depending on the size of the estate, may amount to some small percentage of the estate. These fees are based only on the value of assets passing through probate (not on insurance, employee benefits, joint tenancy assets and a surviving spouse's interest in community property, in a state that recognizes community property). However, even if all of your assets have been placed in a living trust and probate is completely avoided, an attorney and an accountant are usually required to assist with distribution of the trust assets upon death and to prepare death tax returns. They are usually paid by the hour and the cost of such services will depend on the billing rate and the number of hours expended. (Attorneys' and accountants' fees incurred after death are generally tax deductible, whether or not probate is avoided, so the actual savings to your heirs through use of a trust should be calculated on an after- tax basis.)
A cost comparison of trustee and executor fees must also consider whether family members are appointed to act in these capacities. If a bank is appointed as trustee or executor, the comparison becomes more complex since a bank acting as trustee may charge a fee not only after death but also before death if it acts at both times.
Since probate involves notices, court supervision and review, and waiting periods, more time is required to distribute assets from a probate estate than from a living trust. Probate laws have changed significantly in the last few years, however, and the trend has been to remove from the court process much of the routine administration of an estate. Also, the main reason for delay in the distribution of assets after death may involve the filing of the death tax returns and payment of death taxes--not the probate process. The timetable for calculating and paying death taxes is not affected by whether you use a will or a living trust.
Probate records are open to the public; a living trust is not. This may be an important factor to consider in choosing a trust or a will where privacy is a matter of concern.
There are other alternatives to probate, including summary proceedings for small estates (less than a certain value in assets) and for property passing outright to the surviving spouse (or to certain other surviving family members by what are called a states "laws of descent and distribution.") These alternatives are generally inexpensive and efficient and therefore should be considered in appropriate circumstances.
Cost and Complexity of a Living Trust
Using a living trust to carry out your estate plan may require many changes during your lifetime: stocks must be re-registered, trust accounts must be established and title to loan interests, real estate, partnership and other business interests, and all other assets for which you wish to avoid probate must be transferred into the name of the trustee of the trust. Decisions must be made as to which assets are community property and which are separate property (where applicable). This process is called "funding the trust" and requires some time, effort and expense. After funding is completed, it should only be occasionally necessary to consult an attorney with respect to operation of the trust. The cost of operating a living trust during life will exceed the lifetime cost of using a will, but the cost and nuisance should be relatively minor. (No change in lifetime management is involved with a will since it does not become effective until death). Transfers of assets into the trust, questions regarding trustee authority and powers and the difficulty of amending a trust as compared to a will may contribute to the increased lifetime costs of a living trust. These lifetime costs will hopefully be balanced by a savings in fees at death.
Summary
Whether to use a will or a living trust (with a "pour-over" will) to implement your estate plan is not a simple choice. The decision should be made in light of your assets and your estate plan. Out-of-state property, the possibility of a contest after death, the size of your probate estate, the complexity of your business affairs, your situation with creditors or potential creditors and other factors unique to you must be considered in making your choice. In effect, the living trust causes you to do now some of the things which might otherwise await the probate process at your death. This can either give you the satisfaction of knowing you are beginning to "put your house in order" or it can be an unnecessary nuisance.
Note: The same tax planning devices are available whether you use a will or a living trust and thus the choice between a living trust and a will should not be made on the basis of tax considerations.