Guide to Understanding
A living trust (inter vivos trust) is a trust created during a person's lifetime.
Living Trusts in the United States
In the United States living trusts may be either revocable or irrevocable. Living trusts are often used because they may allow assets to be passed to heirs without going through the process of probate. Avoiding probate may save some costs (the probate process can charge a fee based on the net worth of the deceased), time, and maintain privacy (the probate process is public, while distribution through a trust is not).
Living trusts also can be used in planning for the contingency of incapacity.
The grantor may also serve as a trustee or co-trustee. In the case where two or more co-trustees serve, the trust instrument may provide that either trustee alone may act on behalf of the trust. The trust instrument may also provide that the other co-trustee shall act as sole trustee if the grantor becomes incompetent.
Despite the advantages, there are also some negative aspects to a living trust in the United States. Beneficiaries do not save on estate or state inheritance taxes. Setting up a trust may be expensive, and the expense is immediate, not after the grantor's death.
Living trusts generally do not shelter assets from the U.S. Federal estate tax. A married couple having a living trust can, however, effectively double the estate tax exemption amount (the amount of net worth above which an estate tax is levied) by setting up the trust with a formula clause. A formula clause takes advantage of the unlimited spousal deduction allowed under the internal revenue code. When the first married individual dies, the trust pays out to the beneficiaries an amount up to the total unified credit. The amount is set by the formula clause, not strict dollar amounts, because the unified credit increases over time. Without a formula clause, the unified credit could be wasted. The remaining amount of the estate (after the unified credit is exhausted) is paid to the spouse. Thus, when the first spouse dies, no estate tax is owed (just as if the individual died intestate). However, when the second spouse dies, the distribution to the trust beneficiaries is subject to that decedent's unified credit. The rest is subject to estate tax. If the married couple had died intestate, the first decedent's unified credit is lost because everything is transferred to the spouse upon his/her death. A formula clause is necessary only if the value of the estate is larger than the amount of the unified credit.
For a living trust, the settlor will often retain some level of relevance to the trust, often appointing himself as the protector under the trust instrument (in jurisdictions where protectors are recognised). Living trusts also, in practical terms, tend to be driven to large extent by tax considerations. If a living trust fails, the property will usually be held for the settlor on resulting trusts, which in some notable cases, has had catastrophic tax consequences. A living trust is not under the control and supervision of the probate court, and property held by such a trust is not part of a descendent's probated estate.
The Parties To The Trust
The person who sets up the trust; also called the settlor, trustor, or trustmaker. Although the terms grantor and settlor are often used interchangeably, they are not technically the same. A grantor is someone who creates a trust while a settlor is someone who funds a trust. Since this is usually the same person, course has dictated their interchangeability.
This is the person who will manage the trust assets. This also may be the settlor in a Revocable Living Trust, since the settlor wants to manage his or her own property. Some revocable living trusts "self settled trusts" (that is, the grantor is also a beneficiary of the trust).
Where the Grantor is a Trustee, the Successor Trustee is the person who will manage the trust assets when the Grantor dies, or in the event the Grantor becomes incapacitated. Upon the Grantor’s death, the Successor Trustee will immediately have the same powers that the Grantor had as Trustee to buy, sell, borrow, or transfer the assets inside the trust. Also, the Successor Trustee has the right to distribute the trust’s assets according to the Grantor’s instructions in the trust instrument. The Successor Trustee does not have the legal right to change the trust. The trust becomes irrevocable upon the Grantor’s death. The Successor Trustee has the right to manage the assets in the estate, but must do so for the benefit of the remainder beneficiaries. At the Grantor’s death, the Successor Trustee automatically takes over without court order, pays any debts, expenses and taxes directed to be paid by the terms of the written trust document, and then distributes the property to the trust beneficiaries. Where the trust is scheduled to terminate on the Grantor’s death, and the trust is merely a means of avoiding probate, the death beneficiary should ordinarily be named Successor Trustee.
The people who will receive the benefit of the trust’s assets are called beneficiaries. The grantor is often the original beneficiary. Those who take after the grantor's death are “remainder beneficiaries."
Establishing a Living Trust
To establish a living trust, an individual transfers title of his assets from himself as grantor, to a trustee of the trust (often the trustee and grantor are the same person), to administer for the benefit of himself and at least one other person. The trust may also name the remainder beneficiaries who will take after the grantor dies. The beneficiaries get nothing until that person dies.
It may be advisable to use a corporate trustee such as a bank. A substantial advantage of this approach is that a corporate trustee can act in perpetuity, whereas an individual cannot. Corporate trustees must provide accurate and detailed records of all transactions that take place in the trust, for however long the trust exists. Those records become what is known as an "accounting" of the trust, which may be required to be provided to a court or remainder beneficiaries. Corporate trustees also are required to manage the investments held in the trust. Laws have been updated in most states to allow a corporate trustee to act in a "directed capacity", meaning that the trustee is required to have oversight of the trust investments, but not the day to day management of them.
Individual Trusts: To establish a basic living trust, the Grantor signs a document called a declaration of trust, which is similar to a Last Will and Testament. In the document, the Grantor typically names himself or herself as trustee, and transfers assets to that trust (i.e., the transfer is actually made from the Grantor to himself, as Trustee). Because the Grantor is named as the trustee, he or she maintains full control over the assets.
After the Grantor, or the Grantor and Grantor's spouse (in the case of a joint trust) pass away, the person identified as successor trustee in the trust document generally assumes that role. The successor trustee transfers ownership of the assets in the trust to the beneficiaries named in the trust document. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the living trust ceases to exist.