ROBERT K. SMITH, ATTORNEY
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A Living Trust is used in estate planning, in place of the will, as the main document for stating a person's direction for distribution of assets to beneficiaries. It differs from a will in a very significant way, in that a beneficiary will receive his or her inheritance via the Living Trust without probate (a court proceeding), thereby saving family, friends and other beneficiaries time and money. See Probate below for further description.
A Living Trust is created with a document, either a trust agreement or declaration, and the preparation process is similar in many respects to that for a will. However, a Living Trust must be "funded" with assets during thetrust maker's lifetime in order to avoid probate. A Living Trust is funded by changing assets' title documents or beneficiary designations on financial accounts. SeeTrust Funding below for further description. A Living Trust is also used for management of assets, either for the trust maker, due to his or her incapacity, for minor children or for young adult beneficiaries who are legally unable or inexperienced to receive an inheritance "in-pocket" at the time of the trust maker's death. The following terms may be found in a Living Trust document or relate to the trust formation process:
The person who creates the trust, i.e., the trust maker. A married couple may create a trust together and both would carry this title in the document.
The trustee is the person who holds legal ownership (title) rights to assets held by a Living Trust. Generally, the trust maker is the trustee during lifetime. For married couples, the surviving spouse typically continues as the sole trustee until his or her death or incapacity. Since the trustee retains all rights to ownership, the trustee is the signer on all trust accounts and is recognized by financial and real estate/title companies as the responsible person for buying, selling, leasing or managing assets. Therefore, the trust maker does not relinquish legal control of the assets funded into the Living Trust because the trust maker is named as the original trustee of the Living Trust.
A successor trustee is named in the Living Trust document as the replacement for the original trustee, either because of incapacity, resignation or death of the original trustee. The successor trustee acts like an executor under the will and assumes responsibility for paying bills and taxes, controlling assets and distributing inheritances to beneficiaries named in the Living Trust. The successor trustee also acts as the manager of assets and payer of bills for young or inexperienced beneficiaries until whatever ages have been set out in the trust for those beneficiaries to receive their inheritances directly, without further restrictions. Two or more persons may be named as first choice for Successor Trustee and then are called "co-trustees." When co-trustees are named their unanimous decision-making may be required, depending on state law or terms of the trust. While it may not be uncommon for a married couple with two children to name both as successor co-trustees, providing their children equal legal control over their inheritances, naming co-trustees should be considered carefully in order to avoid unintended delays in trust administration.
Age of Distribution to Beneficiaries
When beneficiaries named in a Living Trust are minors or financially inexperienced, a continuing trust should be provided for each of such identified beneficiaries. It is not uncommon, for example, to require that a beneficiary must attain age twenty-five or thirty before an inheritance is distributed to such beneficiary (particularly the children of a trust maker). Until the beneficiary attains the age chosen by the trust maker, the named beneficiary is entitled to benefit from the assets retained in his or her trust, which assets are controlled by the successor trustee. Payments from the beneficiary's separate trust are authorized for the beneficiary's health, support, maintenance and education. Choosing an age for distribution to beneficiaries may depend on the candidates available to act as successor trustee until the beneficiary reaches the age selected. A trust maker may be more comfortable choosing an older age of distribution to beneficiaries when there are trustworthy candidates for successor trustee, such as close family members, who will exercise complete legal control of the beneficiariary's assets until the age specified in the Living Trust.
A trustee, whether the original or successor trustee, holds broad powers in controlling and managing trust assets, including, powers to buy and sell assets, borrow, loan, mortgage, lease, vote securities, resolve claims by or against the trust, hire and litigate, all with unrestricted access to trust assets. However, the trustee exercises such powers on behalf of the beneficiaries as a "fiduciary" and is bound to act in a prudent manner. Since Living Trust documents typically provide for waiver of a bond for the trustee, choosing a successor trustee involves a decision regarding the perceived honesty of the person to be named in the trust. If there are any doubts in that regard, it is prudent to consider an institutional or bonded trustee, subject to a thorough background check of the proposed professional trustee.
Initially, the trust maker is the person entitled to use or consume the trust assets. For married couples joining in one Living Trust together, the surviving spouse typically is the only beneficiary until his or her death, although each trust maker is entitled to name beneficiaries other than a spouse. Upon the death of the trust maker, the beneficiaries named in the trust, usually children, family members, friends or charities, are entitled to receive or consume the assets of the Living Trust. Although children are named as beneficiaries in a Living Trust document, as "successive beneficiaries" they gain no additional legal rights until the death of the trust maker.
A Living Trust is called a revocable trust because the trust maker is able to change the terms of the trust, or revoke the trust entirely. Upon the death of the trust maker, the terms of the trust can not be changed and at such time the trust may become an irrevocable trust. Depending on the type of trust form selected for a married couple, the entire Living Trust may be amended or revoked after the death of the first spouse (Simple Trust or Disclaimer Trust) or part of the trust attributable to the deceased spouse may become irrevocable at the death of the first spouse (A-B or Marital Trusts and the disclaimed portion of the Disclaimer Trust).
A person who is able to make his or her own financial or personal decisions is said to have "capacity" and a person who is not able, either because of mental or physical constraints, is incapacitated. In a Living Trust, the trust maker names a person to assume control and managment of Living Trust assets on the trust maker's behalf, in the event the trust maker is determined to be incapacitated, thereby avoiding a court process called a "Conservatorship" (or adult "Guardianship"). The person named to assume control and management of such assets is either the original co-trustee, such as the spouse, or the successor trustee, who is the same person named to assume control of trust assets after the death of the trust maker. It is common for the Living Trust to define when a trust maker will be determined to be incapacitated, usually by reference to the opinions of physicians, as well as to authorize health providers to discuss medical information with the person named as co-trustee or successor trustee for that purpose (known as a "HIPPA" waiver).
Trust Funding of Assets
A Living Trust holds title to assets that have been transferred to the trustee of the Living Trust either by a change to a title document, an assignment or through beneficiary designation. It is extremely important to fund the Living Trust with a trust maker's probate-type assets, in particular real estate (the residence and other properties), bank accounts and brokerage accounts. There are some assets that do not get transferred to a Living Trust during the trust maker's lifetime, such as retirement or deferred income accounts, and beneficiary designations may identify the trust as the beneficiary under specific factual situations (in most cases, the surviving spouse is named as first beneficiary for a retirement plan account).