Living Trust Basics

Trusts take many forms and can be used to accomplish many goals. Perhaps the most commonly used trust for estate planning is the revocable inter vivos trust, also known as a Grantor Trust, Revocable Trust, or Living Trust. The basic characteristic of this trust is that the grantor (the person creating the trust) establishes and funds the trust during her life and retains the ability to amend or revoke the trust any time prior to incapacity or death, at which time the trust becomes irrevocable. The trust can be used to make distributions of trust assets to heirs and loved ones, or to continue holding assets in trust (e.g. for a minor heir's education, health, support, etc.) until some later time. Anyone thinking of creating a Living Trust should understand what a Living Trust can – and cannot – accomplish.

Can a Living Trust Avoid Probate?

Yes and No. A trust only governs assets that have been transferred into the trust. A grantor may indeed place all her assets into a trust during her lifetime so that, upon her death, she no longer holds title to any assets in her own name, but this is impractical and rarely accomplished. For instance, many grantors create a trust and transfer their most significant assets into the trust – a particular account or the family home – without considering the rest of their property (including their tangible personal property, i.e. their “stuff”). Moreover, grantors may inevitably overlook some assets. Probate of the grantor’s Will is therefore necessary to distribute that remaining property. Accordingly, a comprehensive estate plan which makes use of a Living Trust should include a "Pour-Over" Will, which transfers all remaining assets into the trust upon the grantor's death. Probate of a Will is always necessary to settle one's affairs, if only to ensure a complete transfer of one's estate into the trust.

Can a Living Trust Keep One's Affairs Private?

Yes. A Living Trust is a private document that is not required to be filed in the Probate Court or made available to anyone other than the Trustee(s) and beneficiaries (unless there is litigation or legal / inquiry regarding the trust). In contrast, a Will is only operative upon approval by the Probate Court, at which time it becomes a publicly available document. Moreover, a Will may become subject to the ongoing supervision and approval of the Probate Court, whereas a trust is managed privately without supervision.

Can A Living Trust Be Changed?

Absolutely. During her life, the grantor retains the ability to amend or revoke her trust at any time without the rigid legal formalities required to amend or revoke a Will. No witnesses or notarization are necessary, although some verification of amendment is advisable. Upon the grantor's death or incapacity, the trust becomes irrevocable and no one can alter it.

Will a Living Trust Pay Taxes?

As long as the grantor is acting as Trustee – the person who holds legal title to the assets and is responsible for management – the trust is deemed a "Grantor Trust" for tax purposes and is essentially disregarded by the IRS. The grantor, who has full and unfettered access to trust assets, is treated as the real party in interest and, consequently, reports all trust income on her own Income Tax Return. Upon the grantor's death, the trust becomes irrevocable and, thus, a separate taxable entity. The trust will then require its own tax identification number and the Trustee will file an Income Tax Return for Trusts and Estates. The Trustee may also be responsible for paying state and federal estate taxes if warranted by the size of the grantor's taxable estate.

Will a Living Trust Shield Assets from Creditors?

A Living Trust may protect assets from the claims of a beneficiary's creditors, but it will not protect assets from the claims of the grantor's creditors. Because a grantor has complete access to all trust assets due to her ability to revoke the trust, all assets are considered "available" to her creditors as well. In contrast, a Living Trust may shield assets from the claims of a beneficiary's creditors by use of a "Spendthrift Provision". For example: Grantor creates a Living Trust and funds it with $2M. Per the terms of the trust. Grantor is to receive trust income for life and, upon her death, the remaining trust principal is to be distributed to her Son. The trust has a Spendthrift Provision. During her life, Son is involved in a car accident and a judgment for $1M is entered against him. Son's judgment creditor cannot enforce the judgment against the trust assets. In contrast, if a $1M judgment had entered against Grantor, her judgment creditor could enforce fee judgment against trust. In short, whatever the grantor can access, so too can her creditors.  

Must the Grantor be the Trustee?

No. In fact, a Living Trust should appoint a series of successor Trustees to serve in the grantor's place should she decide she no longer wants to be burdened with the management of trust assets or, more importantly, if she becomes incapacitated. The successor Trustee will step in and continue to manage assets for the benefit of the grantor and the other beneficiaries. This allows for continuity of ownership and management upon grantor's incapacity or death.

Do you have more questions about the use or management of a Living Trust? Please feel free to give us a call for a free consultation: (617) 737-9100.