Foundational Living Trust Essentials

Ever since the Middle Ages, people with significant assets have made use of the “Trust” concept to pass real estate and personal property to future generations. In the previous fifty years , the “Living Trust” has become the de facto bedrock of all estate planning resources.

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

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

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

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

Three Critical Roles

The Living Trust has Three Indispensable Roles:

1. The Grantor/ Settlor/ Creator– This is the man or woman who sets up the Living Trust;

2. The Trustee– This is the Man or woman who manages the affairs of the Trust for the benefit of a third party; and

3. The Beneficiary– this is the ultimate recipient of the benefits of the Trust.

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

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

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

REVOCABILITY

During the Settlor’s lifetime, the Living Trust is fully revocable. This means that the person who established the Living Trust can alter, amend, or revoke the Living Trust.

Upon the Disability 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 (THE A-B TRUST)

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

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

The Survivor’s Trust (Trust A) is also known as the Marital Trust. This Trust continues being 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 change the Beneficiaries of Trust A.

The Bypass Trust (Trust B) is also known as the Credit Shelter Trust. If planning is done properly, Trust B should distribute without being subject to Estate Taxes.

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

THE ESSENTIAL REQUIREMENT OF TRUST SETTLEMENT

The procedure of dividing the Living Trust into Trust A and Trust B is commonly known as as the Trust Administration process. This is a critical process that can not be bypassed.

When the first spouse dies, and a fully-funded Living Trust is in place, there is still work that will need to be done. While the properties funded to the Living Trust should not need to be Probated, overlooking this Trust Settlement until the Surviving Spouse dies can have devastating outcomes for the beneficiaries.

Failing to appropriately divide the Living Trust at the time of the death of the first spouse can (in some cases) cause you to lose the Estate Tax credits that might otherwise be available. When property is distributed to the Beneficiaries, it can also cause major headaches.

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

CONCLUSION

A correctly funded Living Trust is the foundation of a successful Estate Plan. It helps Avoid Probate, Provides greater flexibility than a simple Will, and helps streamline the Estate Settlement process, while keeping costs to a minimum.

Contact a Living Trust Attorney at Ainer and Fraker to discuss your Estate Planning needs in greater detail.