Since the Middle Ages, people with significant assets have utilized the “Trust” idea to pass real estate and personal property to their heirs. In the past half-century , the “Living Trust” has become the de facto bedrock of all estate planning tools.
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 successfully passes to another. Everything within the glass (liquids, ice cubes, etc.) will be successfully passed to the other person. Everything that stays outside of the glass will not be given on to them.
Funding is the procedure of adding your real and personal property– the “water” and “ice cubes”– to the Living Trust, so that they successfully make it to your beneficiaries.
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 establishes the Living Trust;
2. The Trustee– This is the Man or woman who manages the affairs of the Trust for the benefit of a third party; and
3. The Beneficiary– this is the end 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 are 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 on, your property then is managed by your Successor Trustee, for the benefit of your heirs or children (Beneficiaries).
During the Settlor’s life, the Living Trust remains entirely revocable. This means that the man or woman who developed the Living Trust can alter, amend, or revoke the Living Trust.
Upon the Incapacity 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 frequently 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 known as the Marital Trust. This Trust remains revocable during the Surviving Spouse’s lifetime. The Surviving Spouse has limitless 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 terms of Trust B, or (2) Distributed to the beneficiaries that the Surviving Spouse has named 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 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 put into the Living Trust should not have to be Probated, ignoring this Trust Settlement until the Surviving Spouse dies can have devastating outcomes for the beneficiaries.
Failing to properly divide the Living Trust upon the death of the first spouse can (in some cases) cause you to lose the Estate Tax exemptions that might otherwise be available. When property is distributed to the Beneficiaries, it can also cause major headaches.
It is crucial to remember that while a Living Trust has numerous benefits, it is essential 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 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.