Ever since the Middle Ages, people with assets have used the “Trust” idea to pass real estate and personal effects to the next generation. In the past fifty years , the “Living Trust” became the de facto bedrock of all estate planning techniques.
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 vessel (such as a glass) that one person successfully 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 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 heirs.
See our article I’ve Got My Living Trust Now What Do I Do?
Three Essential Roles
The Living Trust has Three Indispensable Roles:
1. The Grantor/ Settlor/ Creator– This is the person who creates 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 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 remain 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 Living Trust is then handled by your Successor Trustee, for the benefit of your heirs or children (Beneficiaries).
During the Settlor’s life, the Living Trust remains totally 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 generally known as an A-B Trust.
Upon the death of the first spouse, the Living Trust breaks in to two (2) separate and distinct trusts.
The Survivor’s Trust (Trust A) is also called 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 called the Credit Shelter Trust. This Trust becomes irrevocable upon the death of the first spouse to die. The Surviving Spouse is may use to All Income from Trust B, but may invade the Principal only for designated purposes, such as for their health, suppport, education and maintenance . This is
called an Ascertainable Standard, and is legally required if the Surviving Spouse continues to act as Trustee of Trust B.
Upon the passing of the second spouse, Trust B is distributed outright to its defined 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 conditions 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 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 needs to be done. While the assets put into the Living Trust should not need to be subject to Probate, neglecting 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 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 very important to remember that while a Living Trust has numerous advantages, it is essential to use it in the manner it was designed.
A properly funded Living Trust is the foundation of a successful Estate Plan. It helps Avoid Probate, Provides greater flexibility than a simple Will, and streamlines 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.