Ever since the Middle Ages, people with assets have used the “Trust” concept to pass real estate and personal effects to their children. In the past fifty years , the “Living Trust” became the de facto bedrock 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 of a Living Trust as a vessel (such as a glass) that one person 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 passed 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 will 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 person who sets up the Living Trust;
2. The Trustee– This is the Person who manages the affairs of the Trust for the benefit of somebody else; 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 created 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 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 property then is handled by your Successor Trustee, for the benefit of your heirs or children (Beneficiaries).
During the Settlor’s life, the Living Trust is 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 generally known as 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 called the Marital Trust. This Trust continues being 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 chosen during their lifetime.
THE IMPORTANT REQUIREMENT OF TRUST SETTLEMENT
The procedure 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 will need to be done. While the properties funded to 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 correctly divide the Living Trust upon the death of the first spouse may (in some cases) cause you to lose the Estate Tax credits that might otherwise be available. It can also cause major headaches when property is distributed to the Beneficiaries.
It is crucial to remember that while a Living Trust has numerous benefits, it is necessary 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 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.