Key Joint Revocable Trust Features

Since the Middle Ages, people with properties have used the “Trust” idea to pass real property and personal effects to future generations. In the previous fifty years , the “Living Trust” became the de facto bedrock 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 within the glass (liquids, ice cubes, etc.) will be successfully transferred to the other person. Everything that is outside of the glass will not be passed on to them.

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

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

Three Fundamental Roles

The Living Trust has Three Essential Roles:

1. The Grantor/ Settlor/ Creator– This is the individual who creates the Living Trust;

2. The Trustee– This is the Individual 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 lack capacity, but still alive, then you remain the Grantor and the Beneficiary. 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 away, your property then is managed by your Successor Trustee, for the benefit of your children or heirs (Beneficiaries).

REVOCABILITY

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

Upon the Incapacity or Death of the Settlor, the Living Trust is 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 typically known as 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 to be revocable during the Surviving Spouse’s lifetime. The Surviving Spouse has unrestricted use of Trust A’s Principal and Income during their life, and is free to add or remove 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 IMPORTANT REQUIREMENT OF TRUST SETTLEMENT

The process of dividing the Living Trust into Trust A and Trust B is commonly referred to 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 must be done. While the assets put into the Living Trust should not have to be Probated, neglecting this Trust Settlement until the Surviving Spouse dies can have devastating outcomes for the beneficiaries.

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

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

CONCLUSION

A correctly funded Living Trust is the cornerstone 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.