Ever since the Middle Ages, families with properties have made use of the “Trust” idea to pass real property and personal property to the next generation. In the previous half-century , the “Living Trust” became the de facto foundation 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 vessel (such as a glass) that one person successfully passes to another person. Everything inside of the glass (liquids, ice cubes, etc.) will be successfully given to the other person. Everything that remains outside of the glass will not be given on to them.
Funding is the process 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 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 establishes the Living Trust;
2. The Trustee– This is the Person 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 set up a Trust, you serve all three roles. You are the Grantor– you set up 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. 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).
During the Settlor’s life, the Living Trust is completely revocable. This means that the person who developed 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 married couple will settle jointly (create) a Living Trust, which is typically referred to 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 known 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) Joined into Trust B and distributed according to the language of Trust B, or (2) Distributed to the beneficiaries that the Surviving Spouse has named during their lifetime.
THE CRITICAL 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 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 need to be subject to Probate, skipping this Trust Settlement until the Surviving Spouse dies can have tragic outcomes for the beneficiaries.
Failing to appropriately divide the Living Trust at the time of the death of the first spouse may (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 numerous advantages, it is vital to use it in the manner it was designed.
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 streamlines 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.