Living Trusts - Frequently Asked Questions
A LIVING TRUST EXPLAINED
A living trust is a document that is created and becomes effective while you are still alive (as distinguished from a testamentary trust, which is created in your will and doesn’t become effective until you die). It can be revocable, meaning that you can change it or revoke it; or it can be irrevocable, which means that you cannot change it without the court’s permission. It is usually created by you, for your benefit, and names you as trustee. This means that you continue to have control over the trust property while you are alive, even though it is now owned by the trust – you can sell it, mortgage it, or do whatever else you want with it. On your death, the principal is distributed to the beneficiaries named in the trust and the trust ends.
A living trust can help avoid probate by transferring your property into the trust so it is not owned by you on your death. Your beneficiaries do not have to deal with the aggravation of going through probate and waiting up to a year before they receive the property. It gives you great flexibility with respect to managing your property – if you have a large estate, you can delegate the task of managing certain types of property to a named trustee while you simply collect any income off the property. And you can name a successor or co-trustee who will take over the management of the trust in the event you ever became incapacitated.
A living trust avoids probate because the property is owned by the trust, not by you, so it is not in your estate when you die. But to avoid probate, the property must be placed into the trust before you die, if it doesn’t happen until your death (done through a pour-over will), the property must pass through probate.
You execute a written trust document (called a “declaration of trust”), which states your intention to hold specific property in trust for yourself or other named beneficiaries. The document usually contains the following information:
- Trustee: It most often will be you, but you can name a co-trustee to help you;
- Beneficiary: You are usually the income beneficiary; you also need to name a principal beneficiary, who will receive the trust property when you die;
- Assets: Include a list of the assets that will be placed in the trust.
You should also name a successor trustee who will distribute the property to the beneficiaries when you die. The trust also should set forth the trustee’s responsibilities, including instructions regarding payment of income and principal to the beneficiaries.
To fund the trust means that you transfer property into it. If you are creating a living trust, you fund it by depositing money into the trust and transferring property into it. The trust’s assets must be formally transferred into the trust so that they are owned by the trustee and not by you. To transfer the property to the trust, you have to change the property’s ownership registration so that it is in the name of the trustee and no longer in your name. For example, if you want to put your stock account in trust, you need to change its ownership registration from “Mary Baker” to “Mary Baker, Trustee of the Mary Baker Trust.” Personal property is usually transferred by a bill of sale and real property is transferred by deed.
TIP: To change the ownership registration to trust property, you will have to contact whichever company or agency issued the original title and ask for a new one in the name of the trustee. For example, if you are placing your bank account in the trust, give a copy of the trust instrument to the bank and ask it to change ownership of the account to yourself as trustee of the trust.
The trust can be funded during your lifetime, or through a pour-over will, which devises your property to the trust when you die. You can transfer assets through a pour-over will only to a trust that is created before or concurrently with your will. If you fund the trust during your lifetime, you avoid probate. But if you fund it through a pour-over will, that property is subject to probate.
You can include anything that you own and have the power to give away, including your interest in property that you own as a tenant in common with others. Examples include artwork, copyrights, real estate, and cash.
Basically, you need to keep records regarding which property is placed into the trust; keep an accounting of income earned by the trust and expenses or payments made by the trust; maintain a separate checking account for the trust; and obtain insurance on the trust’s assets.