Unless you take steps to avoid it, on your death, most of your assets will have to go through probate before reaching your heirs, or even before being used to pay your creditors.  (Probate is the legal process in which a court supervises the distribution of your assets, it nearly always requires an attorney, and is both costly and slow.  Even Allstate, in the estate planning advice it gives in connection with its life insurance sales, recommends using Living Trusts as a means of avoiding the cost of probate.  Click here to see the Allstate advice.)

            One way of avoiding this is a Living Trust, the common term for what is technically called under the law a revocable inter vivos trust.  Some people refer to them as "Loving Trusts."

            A Living Trust is a special legal entity that you create by preparing and executing a formal trust document, declaring that you are holding certain property "in trust."   Unlike most other trusts you can revise or to "revoke" the Trust at any time, taking everything back out of the Trust.

       Because the Living Trust is revocable, it is treated as a fictional entity during your lifetime.  You pay taxes on any trust income during your lifetime, and your creditors could seize trust assets to pay your debts.

       However, at your death, the Trust becomes irrevocable (since you're no longer around to revoke it), and takes on new life as a truly separate legal entity.  Any property owned by the trust is not subject to probate, because it is not owned by you or your estate at all.  However, the probate court has authority to resolve disputes about the Trust, and the Trust usually remains liable for your debts (including any estate taxes).

Living Trust Advantages

           A Living Trust has several benefits, including transferring your estate to your heirs much more quickly, much less expensively, allowing the possibility of tax savings, creating a means of taking care of your assets prior to your death during any period when you are incapacitated, and keeping your wishes and the size of your estate private.  (If you use a Will as your primary estate planning vehicle, anyone who wants to can read it after our death, and check the court file on the probate case — it's a public record — read what you had to say about your various family members and see exactly what assets you had at the time of your death, and also who you owed money when you died.)

            Distribution under a Living Trust is also much less likely to result in challenges from competing heirs fighting over your remains.  (A Living Trust can still be challenged, but it is more difficult to do, and is far less likely to happen, one reason for this is that with a challenge to a Will, all of the assets are still sitting there and are not distributed until after the challenge is complete, meaning the assets serve as a very attractive target.  With a Living Trust, however, the assets are distributed right after your death and it becomes much less attractive for anyone to pursue the assets when they are not in one specific pool and may even already be exhausted before anything is heard in court.  Additionally, with a Will, the Probate Court will require that relatives and creditors likely to make a claim are notified very early in the process, and that they are made aware of their right to file a claim, essentially encouraging claims or challenges to the estate.  With a Living Trust there is no requirement that anyone be notified of your death other than the Trust's beneficiaries -- the people you want to get your assets.)

           Unlike trusts where you lose control over what you put into it, with the Living Trust you can keep complete control during your live, or you can name someone else to take over management responsibility at any time if you desire, and remove them to name another trustee (including yourself) at any time if you no longer like the way the trustee you have named is doing things.

           A Living Trust has another very important feature.  If  you become unable to make financial decisions,  your alternate trustee, such as your adult offspring, takes over management of your assets in the Living Trust. This avoids needing to have a conservator appointed to take care of your estate if you become disabled.

Creating a Living Trust

           Like all Trusts, a Living Trust requires each of the following: a grantor (or settlor) who is the person creating and funding the Trust; a trustee to administer the Trust; and a beneficiary who is to benefit from and enjoy the Trust.  You also have successor trustees and successor beneficiaries.  The unique feature of a Living Trust is that the grantor and the trustee and the beneficiary are all the same during the life of the person who creates the Trust.  And, yes couples often jointly create a Living Trust, naming themselves as co-trustees and co-beneficiaries.

Tax Considerations

           You don't need to prepare any new tax returns, because since you can revoke it at any time the IRS considers everything as still being yours for tax purposes during your lifetime.  You simply report trust  income, deductions and credits directly on your own Form 1040.  Since you can revoke the Trust at any time, transfers to the Trust are not considered completed gifts, meaning there are no gift-tax consequences on the  creation of a revocable trust.

           If drafted with estate tax avoidance in mind, however, a couple with a large estate can avoid hundreds of thousands of dollars in estate taxes by use of a technique called a "by-pass trust."

Creating Living Trust

           To create a Living Trust, you first sign the document creating the Trust, then you deed your house, other real  estate and major assets such as stocks and bonds, from yourself individually and to yourself as trustee. You are the initial  trustee and the initial beneficiary of the Living Trust.  As long as you are alive, you continue to manage these  assets just as before.  When you die, the alternate trustee takes over and distributes your property as you specified in the Trust.

 Transfer of Assets to Trust

WARNING!!!
           The most common problem found with Living Trusts is the failure to properly or completely transfer assets into the Living Trust.  A pour-over Will gets everything into the Trust on death if it is not put in there prior to death, but this requires going through probate court if there are any meaningful assets that did not get put into the Living Trust during life.  This means that all of the benefits of the Living Trust are missed.  You are also also running the risk of those assets being more easily subject to efforts to get them in lawsuits.  It is very important to make sure you properly transfer your assets into the Trust and that you continue putting any new assets you get into the Trust.

           You may transfer assets into the Trust all at once or a little at a time at your discretion, but there is no reason to delay.  Any assets not transferred to the Trust before your death will go into the Trust under the provisions of the Pour-Over Will.  However, those assets transferred by the Pour-Over Will may still need to go through probate court.

           You may transfer to the Trust those personal assets that are titled, such as stocks, bonds, motor vehicles and bank accounts, by contacting the office or bank where the asset is recorded and requesting the change of title from your name to that of the Trust.  For assets which are not titled or recorded at all, simply list them in the Schedule of Trust Property.  You should also advise your insurance carriers that you have transferred your real estate to your Trust and that you wish your Trust to be named in your homeowner's policy.  You may also wish to name your Trust as beneficiary of any life insurance policy; contact your insurance agent for specific advice on this issue.

            Usually you will transfer real estate to the Trust by Quit Claim Deed.  If I've had any role in preparing your Living Trust, at your request I'll be happy to send a blank Quit Claim Deed for your use.  You must execute the Deed before a notary public and then record the Deed at your county courthouse.  Please note that you'll have to pay a nominal recording fee at the time you present it for filing.  If the Quit Claim Deed will not serve your particular land transfer needs, please contact our office for further advice and assistance.

            For some assets, you are best off if you do not put them in a Living Trust.  For example, a tax-deferred retirement plan or IRA is already held in a trust, and you can't transfer these funds into a Living Trust without first removing them from the existing plan (and paying income tax).

            If you fail to properly transfer assets into your Living Trust, you may lose the benefit of the Trust and your estate may be subject to probate anyway.  For example, if you fail to transfer your home into the Trust, it will be a probate asset after both spouses have died.

            Living Trusts incorporate many provisions usually found in wills, such as providing for payment of your debts and taxes; directing the ultimate distribution of your property upon death.  Generally you will still want what is called a "Pour-Over Will" to address your belongings that never got included in the list of assets you transfer into the Trust, or assets improperly conveyed to the trustee.  The Pour-Over Will designates the Living Trust as beneficiary of anything remaining of your estate and further eliminates the motivation to challenge the effectiveness your Family Trust.  But the Pour-Over Will is only a fail-safe and should not be planned to be used, or there is no reason to get a Living Trust, since relying on the Pour-Over Will puts that part of the estate right back in Probate Court.

Transfer of Assets to Trust

           The principal drawback to a Living Trust is that it is somewhat more expensive to create, but that is about it, and the added expense of creating the Living Trust is generally far less than your estate will save by eliminating or reducing the role of probate.  In other words, in the long run the Living Trust usually saves far more money than it costs, though the expense in preparing the Living Trust is prior to death and the expense of probate is after.  (Personally, for me, since I have no wife or children, I would rather hold onto my money during my life and don't particularly care about the costs that come after I am dead -- I'll be dead, so even if the probate process consumes everything, it's not likely to upset me much from the grave.  But for a person wanting to provide for a spouse and children or other loved ones, the savings in probate costs would generally be worth the added estate planning expense of creating a Living Trust.)

Avoid "Undoing" Your Trust

           Refinancing your home may be a great way to save money when interest rates drop, but doing so with property in a Living Trust can create a problem.  Because many lenders do not fully grasp how a Living Trust operates they are reluctant to make loans on property held by Living Trusts.  As a result, homeowners are often required to transfer the home from the Living Trust back to the owners' individual names, before the lender will make the new loan and a deed of trust is recorded.

            After the new loan is made, the homeowner can transfer the home back into the Living Trust, in order to preserve the probate-avoidance benefit.  But if the homeowner fails to take that final step of transferring title back to the Living Trust, of if the homeowner doesn't realize that the home was removed from the trust as part of the mortgage refinancing transaction, then their estate may still be stuck with probate to get the home or other real property distributed as desired.  If it is not in the Living Trust, it must be distributed through the probate process, and for real property getting it into the Living Trust involves recording a new deed.

           While your heirs may well be able to get court approval to confirm trust ownership of a home never formally transferred to the trust, this defeats much of the purpose of a Living Trust, forcing action in probate court.  It's also unlikely that a court would confirm trust ownership if the last document signed was a deed transferring the property out of the trust and into the owners' individual names.

       If you've refinanced your home after executing a Living Trust, you need to review the documents to make sure your home is now held in the name of the Living Trust.  If not, prepare and record a new deed returning the property into the name of the Living Trust.

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