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What is a Living Trust?

November 8, 2012 Douglas Davis

The Revocable Living Trust (“Living Trust”) is a bedrock foundation of the modern estate plan.  A properly drafted Living Trust offers you complete asset control during your lifetime; provides for you and your loved ones in the event of incapacity; and upon death, allows you to pass your  assets to loved ones without the costs, delays, and publicity associated with court probate.

In order to understand the benefits of a Living Trust, we must contrast it with a Will.  A Will is a  testamentary instrument which only takes effect upon your death.  On the other hand, a Living Trust is effective at the moment it is signed and assets are transferred to it.  Both a Will and a Living Trust set forth directions for the distribution of your assets upon your death. But unlike a Will, a Living Trust also directs the management of your assets during life and avoids probate at your death. If you have a properly funded Living Trust, your “successor trustee” will simply continue to manage your assets during any lifetime incapacity and after death, without court intervention or supervision.

Even with a Living Trust you will still need a special kind of backup Will, called a “Pour Over Will.”   A Pour Over Will provides instructions for anything you own at death that was accidently left out of your Living Trust.  It basically says that anything you own at death gets “poured over,” or passes to the Trust.  This ensures that the instructions in your Trust ultimately control distribution to your loved ones.

Simply put, by transferring assets to your Living Trust, you maintain control of those assets during your life and effectively remove them from the probate process after your death.  All of your assets will simply pass according to the instructions you leave in your Living Trust and, although an administration process is still necessary, it does not involve the time, delay, expense, and publicity of probate court intervention.

So, a Living Trust is an agreement that determines how your property is to be managed and distributed during lifetime and upon death.   Some of the many benefits are as follows:

1.  A properly funded Living Trust avoids the publicity, expense and delay of probate in Virginia and in any other state in which you own real estate.  Normally, a husband and wife would each have their own separate Trust and would be trustees of their trust and the trust of their spouse in order to maintain continuity.  The would also name back up or successor trustees to follow their instructions in the event of incapacity during life and then after death.

Both spouses avoid probate with trust planning.  By way of contrast, it is important to remember that joint ownership avoids probate in the first estate, but not in the second.

2.  If your assets are in a Living Trust, you can also avoid court appointed conservatorship if you become disabled and are no longer able to manage your affairs. Your successor trustee will step in and manage trust assets without delay and without the supervision of the court. Your family will not need to petition the court for appointment of a guardian or conservator, which is a public and often embarrassing proceeding.

3.  A Living Trust provides uninterrupted trust administration after your death so that assets in the trust are immediately available to pay necessary expenses and be distributed to your named beneficiaries. With a Will in Virginia, estate assets are generally “frozen” for one (1) year so that creditors may come forward with claims.

4.  A Living Trust is private, unlike a Will which becomes public record at your death.  In addition, it is procedurally more difficult to contest a trust.  While it is difficult to win a Will contest, it is easy to file one as the probate process requires notice to all interested persons informing them of this right.

5.  In a Living Trust you can consolidate assets and incorporate business and tax planning which may help minimize or avoid estate taxes and provide for business succession.

6.  Unlike other probate avoidance devices, such as titling property jointly with right of survivorship or establishing payable on death accounts (insurance, IRAs, pensions, bank accounts), a Living Trust is more likely to preserve your intended plan of distribution, particularly in the estate of the surviving spouse.  A Living Trust serves as the one set of instructions for your entire estate, rather than having to rely upon multiple agreements, policies, beneficiary designations and contracts.

7.  Living Trusts are commonly used to provide for minor children and to protect against spendthrift beneficiaries without court interference.

8.  A Living Trust alone has few income tax incidences and most property can be transferred to a revocable trust without causing income tax problems.  A principal residence that is transferred to a Living Trust continues to be eligible for the Internal Revenue Code Section 121 exclusion of gain.

9.  Unlike a Will, the terms of a Living Trust may be changed at any time until your death, at which point the trust becomes irrevocable.  Someone using a power of attorney will not be able to change the terms of your Living Trust unless you specifically give them that right.  The sole power to amend the trust belongs to you.

10.  “Funding” is the process by which all assets you own are re-titled to reflect your Living Trust as the owner and/or beneficiary.  Funding requires that all bank accounts, real property, bonds, partnership interests, mortgages held, stock certificates, and all other property be re-titled in the name of the trust or assigned to the trust. You should also consider changing beneficiary designations.  Although this takes time and effort on your part, your successor trustee and beneficiaries will appreciate the ease and efficiency of administering your fully-funded trust.

All assets not transferred to the trust prior to your death will have to go through probate.  For this reason, funding your trust should be a top priority.

11.  In Virginia, a transfer of real property to a Living Trust can be done without paying transfer taxes.  Further, we can protect a married couple’s right to hold their residence as Tenants by the Entirety by titling the property in the names of both separate trusts.  This provides creditor and asset protection, and means that any debts or judgments against one spouse will not attach to the entire property.  Please remember that other states may not recognize a tax exemption for transfers to a Living Trust or may impose other requirements.

12.  For married couples it may be difficult to realize estate tax savings if only one trust is used (a “Joint” Trust).  In determining a decedent’s “gross estate” for tax purposes, the IRS includes all assets in which he or she had an ownership interest, and all assets which he or she placed in trust but retained the right to income or the right to control.  If you wish to take advantage of marital estate tax planning, each spouse must establish a separate revocable trust. Commingling the trust assets or income will interfere with the estate plan.  Therefore, we do not recommend using joint trusts for those who have taxable estates.

13.  During your lifetime you can serve as trustee of your own Living Trust.  Married persons usually name their spouse as a Co-Trustee, though this is not required.  In addition, you must choose successor trustees in case something happens to you. The trust can contain a “springing trustee” provision providing that upon proof of disability, a successor trustee will step in and manage your affairs.  In this way, you are able to avoid a costly and public guardianship proceeding.

14.  Since a Living Trust is not subject to the jurisdiction or supervision of the court, it is more difficult for a trust beneficiary to challenge the actions of a trustee.  With a guardianship or a Will, your personal representative must account to the court on an annual basis.

A properly drafted Living Trust will contain all provisions required for the management of your assets and for ultimate distribution after your death.  A completed estate or legacy plan design will also include a Pour Over Will, Durable Financial Power of Attorney, Certification or Affidavit of Trust, Durable Medical Powers of Attorney, Living Will and HIPPA Authorization, Deeds and any Assignments or other documents required to fund your Living Trust.

Every situation is unique and we look forward to working with you to ensure peace of mind in the establishment of a Living Trust as the foundation for your estate plan design.