Fundamental Joint Trust Features

Since the Middle Ages, individuals with properties have made use of the “Trust” concept to pass real property and personal effects to the next generation. In the past half-century , 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 consider a Living Trust as a vessel (such as a glass) that one person passes to another. Everything within the glass (liquids, ice cubes, etc.) will be successfully passed to the other person. Everything that remains outside of the glass will not be given on to them.

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

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

Three Essential Roles

The Living Trust has Three Essential 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 someone else; and

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

During your lifetime, when you create a Trust, you act in 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 lack capacity, but still alive, then you are still the Grantor and the Beneficiary. However someone else will need to be your Successor Trustee, to handle your affairs for your benefit– if you can not do so.

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

REVOCABILITY

During the Settlor’s lifetime, the Living Trust is totally revocable. This means that the person who put together 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 settle jointly (create) a Living Trust, which is often called an A-B Trust.

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

The Survivor’s Trust (Trust A) is also named the Marital Trust. This Trust is 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 subtract 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) 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 CRITICAL REQUIREMENT OF TRUST SETTLEMENT

The procedure 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 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 have to be subject to Probate, ignoring this Trust Settlement until the Surviving Spouse dies can have terrible outcomes for the beneficiaries.

Failing to properly divide the Living Trust upon the death of the first spouse may (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 crucial to remember that while a Living Trust has numerous benefits, it is crucial to use it in the manner it was designed.

CONCLUSION

A correctly 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 Administration 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.