Understanding the Benefits of a Living Trust in Estate Planning

By Cynthia Jamison Jackson

The living trust can be a valuable estate planning device if properly executed and funded.

For those who may not be familiar with the mechanics of a living trust, it is helpful to review some basic information. A living trust is an artificial being, just as a corporation or partnership is an artificial being. The individual who creates the trust is the Grantor or Settlor. She sets forth the terms of the Trust in a document known as the Declaration of Trust or Trust Agreement. The Trust is held and controlled by the Trustee, and the Trustee holds the assets of the Trust for the benefit of people known as beneficiaries.

The term “living” trust refers to the fact that the document is revocable. The terms of the trust are changeable at any time by the Grantor as long as she is living and competent. As the Grantor experiences life changes such as the birth of grandchildren or the divorce of a child or grandchild, the document can be changed to reflect those changes. Flexibility is therefore an advantage of this type of trust.

Another advantage is the ability to make decisions for pre-death care. The Trustee of the living trust owns the assets in the trust in her capacity as trustee. For this reason, the successor trustee is able to step in and control the assets if the Grantor becomes physically or mentally unable to do so, temporarily or permanently. The Grantor thus ensures that a trusted friend or relative will have immediate access to funds and assets if necessary to care for her, and can state what form she wants the care to take. The Grantor avoids guardianship, a time consuming, expensive, and demeaning process for the incapacitated person. With a living trust, the Grantor retains some control over her life while incapacitated, in that the trustee is bound by the terms of the trust document that the Grantor has created.

The living trust also acts as a Will substitute in most cases. In addition to setting forth pre-death dispositions of assets, a living trust also describes what happens to the assets upon the Grantor’s death. Because the trust is a separate legal entity, and the assets transferred to the trust are not owned by the Grantor on the date of her death, the assets are not subject to probate. However, probate may be necessary or desirable in the event real property is owned by the trust due to the necessity of clearing creditors’ claims or if a homestead determination is necessary. Generally though, another advantage of a living trust is the ability to make disposition of assets without the delay and expense of a probate proceeding.

The first step in creating a living trust, is that the attorney will draft a Trust Agreement or Declaration of Trust. This document will state the Grantor’s name, and the assets to be put into the Trust. Usually, the Grantor will name herself as the initial Trustee, but the office of trustee can be held by Co-Trustees, so that either of the co-trustees can act. This is useful to prevent any delay in allowing the successor trustee to step in and take action.

The living trust document describes the duties of the Trustee. Generally, the Trustee should hold the assets in her name as Trustee, invest the assets, and pay the income as designated in the Trust. While the Grantor is living and capacitated, all income is generally paid to the Grantor. She is also entitled to receive any or all of the principal of the Trust, as requested.

The trust document will designate a successor trustee who will assume the duties of Trustee if the Grantor becomes incapacitated or dies. Upon such time as Grantor becomes incapacitated, the Trustee must use all of the income and such principal as is required to care for the Grantor. The Grantor has the ability to spell out in the trust documents what happens if the Grantor requires skilled care, where she wants to live, and other lifestyle decisions.

Upon the Grantor’s death, the document also states what happens to the Grantor’s assets. For this reason, the trust document must meet the same formalities for execution as a Will, even though it will not be probated.

The Trust might also contain tax saving devices, such as the credit shelter trust, used to shelter the unified credit for each spouse . The Trust can make provision for incentives for children to graduate from college or to go into the family business. It can provide for a spendthrift, handicapped, or substance-abusing child, to name but a few.

Once a trust has been fully executed, all assets to be controlled by the trust must be transferred to the name of the trustee, as trustee for the trust. This is called funding the Trust, and is one of the most important parts of the process. A Grantor may execute the most perfectly drawn trust with all contingencies considered, but if the Grantor’s assets are not owned by the Trust, the Grantor has accomplished nothing. A stockbroker or other investment advisor, the banker and the estate planning attorney can assist in the funding of the Trust.

Be aware that the implementation of a living trust will create effort initially, in that all assets must be funded into the Trust. It is also more expensive than other estate planning devices such as a simple Will. It complicates the titling of assets, but can be a very useful tool where its use is appropriate.