Living Trusts 101

February 25, 2016

 

What is a living trust? Do you need one?

 

A living or revocable trust is a legal agreement between a grantor (the person with the property) and a trustee (the person managing the property). The trust holds property transferred to it from the grantor for the trust's beneficiaries. It is common for spouses to have a "joint living trust" wherein they are both grantors and trustees of the trust. 

 

Because the trust is revocable, property can be placed in and removed from the trust by the grantor at will. While the grantor is living he or she also serves as the trustee. The trust property is controlled and managed by the trustee per the terms of the trust.

 

Property in a living trust can be distributed to trust beneficiaries without having to go through the probate court process upon the grantor's death. By law it is not subjected to probate, which saves the estate a lot of time and money. It also keeps the affairs of the estate private since it is not public record unlike probate.

 

A properly drafted and implemented living trust can also reduce estate or capital gains tax liability in certain circumstances where that could be an issue. It allows a married couple to utilize their full estate tax credit reducing the taxable size of the estate. It may also give the beneficiaries a "step up" in basis for distributed trust assets.

 

Funding the trust, i.e., transferring property that appropriately should be held by it, is a critical element to enjoy the benefits of a living trust. Sometimes an attorney will help establish a living trust for a client but then neglects to help get it funded, which defeats the purpose of having it in the first place. It is particularly important for the grantor to place his or her real estate in the trust since real estate is generally subject to probate. 

 

So, do you need one? If you a) own a house or other real estate, b) have savings or investment accounts, c) have life insurance, and/or d) own business interests, then you ought to have a living trust. It is not difficult or expensive to set up and manage. The cost to draft a living trust is typically $1500 or less. In the long run it can prevent many headaches and provide a mechanism to thoughtfully pass on an estate. 

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