Maybe you have a friend or family member that has talked about setting up a “living” or “revocable” trust, and now you’re wondering exactly what that is and whether it might be an appropriate estate planning tool for you. Fair question.
A living trust is not necessary for everyone, but – in the right situations – including it in an estate plan offers important advantages.
This overview covers the most frequently asked questions about living trusts, and also provides links to further reading that can help you determine if a trust might be a good fit for you.
What is a living trust?
A living trust (also referred to as a “revocable” trust) is a trust fund that owns your assets while you’re still alive. It is basically a written document that provides for the management of property.
A living trust is considered revocable because you, as the grantor, can amend or revoke the trust at any time.
Who controls a living trust?
There are three parties associated with a living trust:
- The grantor who creates and funds the trust;
- The trustee who manages the trust; and
- The beneficiaries who are or will be entitled to funds from the trust.
Most of the time, the trustee of a living trust is the same person who created (the grantor) the trust. This means that — as the grantor/trustee — you retain complete control over your assets. You can do with them whatever you like, including buying and selling, and taking them out of the trust for your personal use. You suffer no loss of control or of income.
What are the benefits of a living trust?
1. Avoid Probate
Assets that have been properly transferred into a living trust will not require probate administration — filing forms, reporting on assets and expenditures, attending hearings, providing notice, etc. — upon the grantor’s death. Instead, the trustee or successor trustee can simply distribute assets according to the terms of the trust. It is important to note, however, that assets in a trust must still be reported on the Connecticut estate tax return, regardless of whether or not any estate tax is actually due.
2. Maintain Privacy
Because a standard Will becomes a public document, anyone can read it. The terms of a living trust, however, are not public.
3. Ensure Proper Management
Having a living trust in place means that if the grantor becomes mentally or physically disabled, there is no need to seek a conservator in the probate court. Instead, the successor trustee can simply continue managing the trust and its assets according to the established terms.
4. Deter Challenges
Because the process of setting up and funding a living trust is more involved than setting up a standard Will, it is more difficult for anyone who might want to contest the trust to prove that the grantor was coerced or otherwise influenced.
What does it mean to “fund” a living trust?
“Funding” your trust simply means that you are transferring your assets into the trust, typically by titling your assets and beneficiary designations in the name of your trust. This may seem potentially overwhelming, but an estate planning firm can provide assistance to make the process simple.
Failing to fund a trust is the single biggest mistake people make when setting up a living trust. Until you transfer your assets into the trust, you cannot reap any of the benefits of having the trust in the first place.
What goes into a living trust?
Here is a quick checklist of assets that do and do not belong in a living trust:
- Bank Accounts — Check with your bank about the transfer process and any applicable penalties.
- Corporate Stocks — Contact the broker who manages the account or the issuer of the financial instrument to change the name on the account to reflect ownership by the trustee.
- Bonds — Special attention must be paid to unregistered or bearer bonds or debentures, for which you must be able to prove transfer (typically with a transfer document).
- Tangible Investment Assets — (e.g., gold bullion, silver coins, art objects, etc.) These can be transferred using an instrument of assignment or a Bill of Sale for no consideration. It’s also advisable to keep a detailed and accurate inventory.
- Partnership Assets — (general or limited) This requires a new certificate of partnership or an amendment to the existing partnership agreement.
- Real Estate — Transfer the title by means of an executed, notarized, and recorded deed. If there is an existing mortgage, you must contact the mortgage company.
- Life Insurance Death Benefits — While ownership of life insurance policies is not generally transferrable into a living trust, the death benefits can be made payable to your trustee by completing change-of-beneficiary forms with your insurance company.
Assets that cannot be put into a living trust:
- Retirement Accounts — This includes your IRA, Roth IRA, 401K, 403b, 457 and the like. Putting any of these assets into a revocable trust can have devastating tax ramifications.
Find out if a living trust is right for you.
A living trust may or may not be appropriate for you. As with many planning strategies, it depends on your particular circumstances.
To learn more and to find out if you should include a living trust in your estate plan, don’t hesitate to give us a call. We’d love to be part of your estate-planning process, and ensure that your trust does exactly what you want it to do.