What Is a Living Trust?
The term, “living trust” is used to describe a trust created by a person during his or her lifetime. Lawyers will often refer to a living trust as an inter vivos trust, using the Latin phrase for this type of trust.
The most common type of living trust is a revocable trust, and in every day parlance, this is the type of trust people refer to with the term “living trust”. A living trust is used as substitute for a will in that when a person has a living trust, it is the living trust that says where the person’s property goes at his or her death rather than his or her will. Any provisions that a person could make in his or her will as to whom he or she wants his or property to go at death and how it should go, can instead be included in a living trust.
The primary reason people use a living trust as opposed to a traditional will, and the reason for its wide spread popularity today, is to avoid probate. That is, if assets are held in a Living trust as opposed to being owned in the individual name if the person who creates the trust, those assets avoid probate when the person dies. Another purpose of a living trust is to make the management of a person’s property and the support of him or her and his or her family as efficient and seamless as possible if the person at any time becomes mentally incapacitated.
How is a Living Trust Created?
A living trust is created by a written document in which the person creating the trust spells out the trust’s terms, and by that person then transferring ownership of his or her assets to the living trust. That might include transferring ownership of your home, bank and other financial accounts and the like to the trust.
What is the Trustee of the Living Trust and Who Would That Be?
The living trust document names a trustee. The trustee is the only person who has authority to invest, manage and expend the trust assets. Typically, the creator of the trust (also known as the “grantor” of the trust) will name himself or herself as the trustee. Accordingly if you create a living trust and name yourself as the trustee, you have exactly the same dominion and control over the trust property as if the trust did not exist.
What is the Process for Paying Debts and Distributing Assets Held in a Living Trust When You Die?
It’s very similar to the probate process your family would go through if you died with a will instead of a living trust. With a will, the will names an executor of your estate to take care of your final affairs, file your final income tax return, pay any remaining debts that you have, and once all of this is done, distribute your remaining assets to the beneficiaries you have named. If instead you have a living trust, your trust document names a successor trustee to take over when you die, and that successor trustee does essentially the same things an executor under your will would have done, but without having to be subjected to the additional court interference and expense associated with probate.
Is Property Distributed From a Living Trust Protected from the Beneficiaries’ Creditors?
That depends on the terms of the trust. If the trust says for example that when I die, my trust terminates and the property is distributed in equal shares outright to my three children, then once my children own that property, it’s subject to their creditors. However, there are planning techniques in which rather than distributing the property outright to my children, I can distribute it to them with a protective shell around it so to speak, in the form of an another trust for their benefit, and that can provide substantial protection from their creditors.
Does a Living Trust Have to File an Income Tax Return?
During the trust creator’s lifetime, a living trust does not file its own income tax return. The tax I.D. number of my living trust, for example, will be my Social Security number. So all trust income is reported to the IRS under my Social Security number and I just pick it up on my personal income tax return every year.
However, when I die my living trust becomes a separate taxpayer. The trust then has to be assigned a separate tax I.D. number and the Trustee must then begin to file a separate income tax returns for the trust until all of the trust assets have been finally distributed to the beneficiaries.
Can a Living Trust Help to Reduce Tax?
Generally, a living trust will not reduce income tax because all trust income is reported on the trust creator’s personal income tax return and the exact same tax is paid as if the trust didn’t exist.
How Long Does the Process of Creating a Living Trust Generally Take?
Generally, it should not be a lengthy process. In our office, it’s a very efficient process. The trust documents in most instances can be designed, completed, signed and the client’s property transferred to the living trust within a period of 30 to 60 days from the first time we meet with the client.
How Long Does a Living Trust Last?
Generally, a living trust can last for however long the creator of the trust wants it to. In some states, there is a limit, which usually limits the duration of the trust to a period of approximately three succeeding generations. But in some states, like Missouri, there is no limit, which means a trust can be created last forever. There are, of course, many practical considerations to go into how long a person would want his or her trust to last and we discuss these with each of our clients as we design their living trusts.
What Sets Your Firm Apart in Setting up Trusts?
What sets our firm apart is our unique process for creating the trust. Most lawyers treat the process as a transaction. They spend a couple hours with the client and have them come back a few weeks later to sign the trust, and they never see them again. There is nothing in their process to transfer the client’s property to the trust, or as time passes, to keep it up to date. In our process, we take additional steps to make sure that at any particular point in time, if they become incapacitated or die that the objectives that they have for themselves and their families will be accomplished.
It’s done in three parts. First, to design every trust to meet the particular needs and objectives of each client. Secondly, trusts don’t work properly unless the assets are titled in the trust and beneficiary designations are coordinated with the trusts. All of this is taken care of in our office when clients sign their trusts.
Finally, we recognize that as time goes by things will change. Over time, there will be changes in clients’ families, their assets, the laws, their goals and objectives and in the world. Accordingly we make available to our clients a formal periodic review process so that as these changes occur, their planning is kept up to date.
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