Ever since the Middle Ages, people with significant assets have used the “Trust” concept to pass real property and personal effects to their children. In the previous fifty years , the “Living Trust” has become 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 of a Living Trust as a vessel (such as a glass) that one person successfully passes to another person. 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 passed 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 will make it to your heirs.
See our article I’ve Got My Living Trust Now What Do I Do?
Three Critical Roles
The Living Trust has Three Fundamental Roles:
1. The Grantor/ Settlor/ Creator– This is the man or woman who establishes the Living Trust;
2. The Trustee– This is the Individual 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 life, when you create a Trust, you act in 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 remain the Grantor and the Beneficiary. However someone else will need to be your Successor Trustee, to deal with your affairs for your benefit– if you can not do so.
After Death– Once you have passed away, your property is then managed by your Successor Trustee, for the benefit of your children or heirs (Beneficiaries).
During the Settlor’s life, the Living Trust remains totally revocable. This means that the individual 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 jointly settle (create) a Living Trust, which is commonly 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 named 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 conditions of Trust B, or (2) Distributed to the beneficiaries that the Surviving Spouse has selected during their lifetime.
THE IMPORTANT REQUIREMENT OF TRUST SETTLEMENT
The procedure 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 skipped.
When the first spouse dies, and a fully-funded Living Trust is in place, there is still work that will need to be done. While the assets funded to the Living Trust should not have to be subject to Probate, neglecting this Trust Administration until the Surviving Spouse dies can have devastating results 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 forfeit the Estate Tax credits 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 advantages, it is crucial 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 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.