Since the Middle Ages, families with assets have utilized the “Trust” idea to pass real estate and personal property to future generations. In the previous fifty years , the “Living Trust” has become 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 about a Living Trust as a vessel (such as a glass) that one person successfully 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 given 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 Critical Roles:
1. The Grantor/ Settlor/ Creator– This is the man or woman who sets up the Living Trust;
2. The Trustee– This is the Individual who manages the affairs of the Trust for the benefit of someone else; 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 serve 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 remain 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 then is managed by your Successor Trustee, for the benefit of your children or heirs (Beneficiaries).
During the Settlor’s life, the Living Trust remains entirely 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 married couple 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) separate and distinct trusts.
The Survivor’s Trust (Trust A) is also named 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 named 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 access the Principal only for designated purposes, such as for their health, education, maintenance and suppport . This is
named an Ascertainable Standard, and is legally required if the Surviving Spouse continues to serve as Trustee of Trust B.
Upon the passing of the second spouse, Trust B is distributed outright to its stated beneficiaries. Trust B should distribute without being subject to Estate Taxes if planning is done properly.
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 chosen during their lifetime.
THE ESSENTIAL REQUIREMENT OF TRUST SETTLEMENT
The process 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 bypassed.
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 Probated, overlooking this Trust Settlement until the Surviving Spouse dies can have tragic results for the beneficiaries.
Failing to correctly divide the Living Trust at the time of the death of the first spouse may (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 very important to remember that while a Living Trust has numerous advantages, it is important to use it in the manner it was designed.
A correctly 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.