Living Trusts

Since the Middle Ages, people with assets have used the “Trust” to pass their real estate and personal property to the next generation. In the past fifty years, the concept of a “Living Trust” has become the de facto foundation of all estate planning tools.

But the question persists in many people’s minds: What exactly does a Living Trust do?

It is helpful to think of a Living Trust as a container (such as a glass) that one person passes to another. Everything inside of the glass (liquids, ice cubes, etc.) will be successfully passed to the other person. Everything that remains outside of the glass will not be passed on to them.

Funding is the process of adding your real and personal property – the “water” and “ice cubes” –to the Living Trust, so that they successfully make it to your beneficiaries.

See our article, I’ve Got My Living Trust, Now What Do I Do?

Three Essential Roles

A Living Trust has Three Essential Roles:

  1. The Grantor / Settlor / Creator – This is the person who Establishes the Living Trust.
  2. The Trustee – This is the Person who manages the affairs of the Trust for the benefit of someone else
  3. The Beneficiary – this is the ultimate recipient of the benefits of the Trust.

During your lifetime, when you set up a Trust, you serve all three roles. You are the Grantor – you created the Trust. You are the Trustee. And you are the Beneficiary during your lifetime.

During Incapacity – If you are incapacitated, but still alive, then you are still the Grantor and the Beneficiary. But someone else will need to be your Successor Trustee, to handle your affairs for your benefit – if you cannot do so.

After Death – Once you have passed on, your property then is managed by your Successor Trustee, for the benefit of your children or heirs (Beneficiaries).

Grantor (Settlor) Trustee Beneficiary
During Lifetime YOU YOU YOU
During Incapacity YOU Successor Trustee YOU
After Death YOU Successor Trustee Children/Heirs

During the Settlor’s lifetime, the Living Trust is completely revocable. This means that the person who created the Living Trust can alter, amend, or revoke the Living Trust during his or her lifetime.

Upon the Incapacity or Death of the Settlor, the Living Trust becomes irrevocable. This means the Living Trust can no longer be altered, amended, or revoked without court permission.

The Joint Husband and Wife Living Trust (A-B Trust)

Often a husband and wife will jointly settle (create) a Living Trust, which is commonly known as an A-B Trust.

Upon the death of the first spouse, the Living Trust splits in to two (2) separate and distinct trusts.

The Survivor’s Trust (Trust A) is also known as the Marital Trust. This Trust remains revocable during the Surviving Spouse’s lifetime. The Surviving Spouse has unlimited use of Trust A’s Principal and Income during their life, and is free to add or remove beneficiaries of Trust A.

The Bypass Trust (Trust B) is also known as the Credit Shelter Trust. This Trust becomes irrevocable upon the death of the first spouse to die. The Surviving Spouse is entitled to All Income from Trust B, but may invade the Principal only for specified purposes, such as for their health, maintenance or welfare. This is known as an Ascertainable Standard, and is required if the Surviving Spouse continues to serve as Trustee of Trust B.

Upon the death of the second spouse, Trust B is distributed outright to its stated beneficiaries. If planning is done properly, Trust B should distribute without being subject to Estate Taxes.

At this time, Trust A can either be (1) Folded into Trust B and distributed according to the terms of Trust B, or (2) Distributed to the beneficiaries that the Surviving Spouse has chosen during their lifetime.

Grantor (Settlor) Trustee Beneficiary
During Joint Lifetime H & W H & W H & W
First Spouse Dies H & W Surviving Spouse Surviving Spouse
Second Spouse Dies H & W Successor Trustee Children/Heirs

The Critical Requirement of Trust Settlement

The process of dividing the Living Trust into Trust A and Trust B is commonly referred to as the Trust Settlement process. This is a critical process that cannot be skipped.

When one spouse dies, and a fully-funded Living Trust is in place, there is still work that needs to be done. While the assets funded to the Living Trust should not have to be Probated, ignoring this Trust Settlement until the Surviving Spouse dies can have disastrous results for the beneficiaries.

Failing to properly divide the Living Trust upon the death of the first spouse can (in some cases) cause you to lose the Estate Tax exemptions that might otherwise be available.  It can also cause major headaches when property is distributed to the Beneficiaries.

It is important to remember that while a Living Trust has many benefits, it is important to use it in the manner it was designed.

Conclusion

A properly funded Living Trust is the cornerstone of a comprehensive Estate Plan. It provides greater flexibility than a simple Will, and helps streamline the Estate Administration process, while keeping costs to a minimum.

Contact Us to discuss your Estate Planning needs in greater detail.

A Living Trust is your “Master Set of Instructions” Regarding your Estate. It Covers Who gets What, When and How.