Fundamental Joint Living Trust Basics

Ever since the Middle Ages, families with assets have utilized the “Trust” idea to pass real property and personal property to the next generation. In the past half-century , the “Living Trust” became the de facto foundation of all estate planning techniques.

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 vessel (such as a glass) that one person passes to another. Everything inside of the glass (liquids, ice cubes, etc.) will be successfully given to the other person. Everything that is outside of the glass will not be transferred on to them.

Funding is the procedure of putting in your personal and real property– the “water” and “ice cubes”– to the Living Trust, so that they successfully will make it to your heirs.

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

Three Critical Roles

The Living Trust has Three Fundamental Roles:

1. The Grantor/ Settlor/ Creator– This is the individual 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 another person; and

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

During your lifetime, when you set up a Trust, you act in all three roles. You are the Grantor– you set up 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. However someone else will need to be your Successor Trustee, to handle your property for your benefit– if you can not do so.

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

REVOCABILITY

During the Settlor’s lifetime, the Living Trust remains fully revocable. This means that the individual who created 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 frequently called an A-B Trust.

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

The Survivor’s Trust (Trust A) is also referred to as the Marital Trust. This Trust continues being revocable during the Surviving Spouse’s lifetime. The Surviving Spouse has limitless use of Trust A’s Principal and Income during their life, and is free to add or subtract the Beneficiaries of Trust A.

The Bypass Trust (Trust B) is also referred to 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, suppport, education and maintenance . This is
known as an Ascertainable Standard, and is legally required if the Surviving Spouse continues to act 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.

THE IMPORTANT REQUIREMENT OF TRUST SETTLEMENT

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

When one 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 have to be subject to Probate, overlooking this Trust Settlement until the Surviving Spouse dies can have terrible outcomes for the beneficiaries.

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

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

CONCLUSION

A properly funded Living Trust is the cornerstone of a comprehensive 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.