What are trusts and living trusts?
A trust is where property is managed by one person or a trustee for the benefit of another or the beneficiary. The trustee has the legal title to the property and has a fiduciary duty. It is the grantor who creates the trust for the benefit of his intended beneficiary. The grantor may not designate another person as a trustee and act as the trustee themselves. Since the grantor has the right to revoke the trust any time they wish, that trust is referred to as a revocable trust.
A living trust, otherwise known as an inter vivos trust, is created during a grantor’s lifetime instead of upon their death.
What are the terms and conditions of a living trust?
The terms and conditions of a trust is contained within the trust document. Governed by local law, the trust document usually takes a form of a deed called Declaration of Trust. The trustee has an obligation to perform their tasks according to the terms of the trust. If the trustee fails to properly administer the trust, they may be held personally liable for issues that may arise. For example, many courts have found trustees to be liable for income for failing to invest properly and expand the trust fund.
Why do people create living trusts?
Living trusts are usually established to avoid probate proceedings. Probate is the process of paying debts and distributing the property to the heirs of the deceased and is administered by the court. The probate process costs money and could take a long time. As a result, heirs often have to wait months or even years to receive they share. Sometimes by that time, the estate of the deceased has decreased in value because of court and attorney’s fees.
Some additional reasons why living trusts are created is to either reduce taxes, regulate the use of assets when the owner becomes incapacitated, or ensuring financial privacy.
How does a living trust avoid probate?
All property transferred in accordance with a living trust avoids probate. Upon a grantor’s death, the ownership of a property in a trust is transferred by the trustee to the beneficiary. It usually takes a few weeks, as opposed to months or years of probate.
Once all the property included in the trust is transferred to the beneficiary of the trust, the trust ceases to exist.
What are the costs involved in creating a living trust?
Creating a living trust is a fairly simple process. In fact it may be simple enough that it can be made without a lawyer. There are a lot of resources available on the creation of a trust and sample formats of a Declaration of Trust are available on the internet. But it is always a better idea to work with a lawyer to make sure that all your questions are properly answered.
There are no court proceeding involved in filing for the living trust or transfer of property deeds to a trust, so you avoid court costs; but you may need to pay filing fees. Some states such as California may charge different amount in fees depending on the size of the estate.
The trustee will be compensated for any work done in administering the living trust and may legally take a reasonable amount from the fund. The trustee may not waive this fee.
How tedious is it to keep a living trust?
There are some paper work involved in keeping a living trust. Following the creation of a trust through the Declaration of Trust, the grantor will have to make and sign new deeds for every time that they ad an asset to the trust. Since living trusts have become more common, the process is no longer as burdensome as it used to be and has also become more efficient.
Is a living trust document ever made public, like a will?
No. Only the documents that go through probate become part of public records, such as wills. Since living trust do not need to go through probate, it is never made public.
Is property in a living trust protected from creditors?
No. All of the grantor’s assets, including those held in a living trust, are subject to lawful debts.
If a house is held in trust and is transferred to your children upon your death, your creditor can still demand from your children to pay for the debt up to the value of the home. Title laws had made real estate ownership part of public record that’s why creditor’s can find out to whom a property is transferred and collect the decedent’s debts. But finding out who is the new owner to a title is a bit more difficult to creditors since trusts are not public records, unlike a will. It can be a tedious process and some creditor’s may not consider this.
However, probate can protect heirs from creditors if the creditors do not file claims within a given time. During the probate process, all known creditors are notified of the debtor’s death. Once they receive the notification, they have to file their claims against the decedent’s assets before the deadline. Otherwise, they can no longer claim.
Should I still make a last will and testament if I have a living trust?
Yes. A will would often include a clause that identifies recipients of all property not left to a specific beneficiary. If, for example, a person buys a car shortly before their death, then they wouldn’t have had the time to include the car in their will nor transfer it in a trust. But if the will contains the above-mentioned clause, then the person named in the will will get the car without the car having to pass through probate.
There is also the pour-over will, which is a type of will that orders for all of a grantor’s property to pour into their trust upon their death. This allows for the distribution of all of her assets to the beneficiaries named in a trust, ensuring that none fall in probate. Check with your state’s laws to find out if you can make such a will because the pour-over is applicable only in some states.
If there is no last will and testament, any property not included and transferred through a living trust is distributed according the the state’s laws on intestate succession. But even the state provides for the distribution of your assets upon your death, it may not be distributed in the way you exactly want; that’s why it is important to make a will.
Will a living trust reduce estate taxes?
In some cases, yes. A simple living trust has no effect on taxes, but more complicated living trusts may.
An AB trust is designed for married couples with children. Also known as credit shelter trust, marital life estate trust, exemption trust, and marital bypass trust, this trust allows for each of the spouses to leave their property in a trust for life, which will later be transferred to their children. For example, if Husband and Wife create an AB trust, and Husband dies, Wife receives all of the property of the trust. Then, when Wife dies, her interest in all of that property passes to their children. This AB trust can potentially save up to hundreds of thousands of dollars in estate taxes.
The creation of a living trust may seem like a daunting task with all the paperwork required, but it is still better than allowing your properties to go through probate. Having a living trust would save your estate a lot of money upon your death. In addition to that, your heirs will be able to obtain their share sooner than they would if your property went on probate.
Contact your local government for more information on living trusts or consult a lawyer.