What is a Living Trust and do I Need One?

A trust is an estate planning document that provides for the management of property. There are a number of different types of trusts including revocable (living trust) and irrevocable trusts. Depending on the type of trust, objectives can range from reducing estate tax exposure to avoiding probate administration.

A trust is an arrangement among three basic parties:

1. the grantor who creates and funds the trust
2. the trustee who manages the trust
3. the beneficiaries who are or will be entitled to funds from the trust

A (revocable) living trust:

• Is a written document that will typically explains how you want any money in the trust to be spent during your lifetime and how you want any money in the trust distributed after you die.
• Is revocable, meaning that the grantor can amend or revoke the trust at any time.
• Enables you to be the grantor and also the trustee of the trust while you are alive and capable of managing the assets. (You also can be the grantor, trustee, and beneficiary of a living trust during your lifetime)
• Allows you to retain complete control over your assets
• Should name a successor trustee to take over managing the trust once the original trustee is no longer able to handle the trust him/herself.

Since the grantor retains the power to change or revoke a living trust, the grantor still retains as much control over the assets in the trust as if he/she still owned them outright.

Although the trust is the legal owner, the IRS treats you as the owner because you really have not parted with control - you can take the assets out of the trust for your personal use at any time and for any reason. You suffer no loss of control or of income.

In addition, because the IRS treats the grantor as the owner of any money in the trust, any income earned will be reported on the grantor's personal 1040 Income Tax Return. No separate income tax return is necessary so long as the grantor is the trustee or co-trustee.

On the other hand, since a living trust is revocable and the grantor retains control over the assets, any assets in the living trust at the grantor's death are includable in the grantor's gross estate for estate tax purposes.

This is an important point: a living trust does not of itself save any estate taxes. For this reason, there is no minimum net worth or wealth that is necessary to consider creating a living trust.

There are generally three reasons to create a living trust:

1. Avoid probate (but not the probate fees!)
2. To keep things private as the terms of a living trust (unlike a Will) are not made public
3. To ensure proper management of your assets in the event that you are unable to manage the assets on your own

Do keep in mind that a living trust only benefits you if the trust is funded!

Contact us to discuss if a living trust may or may not be appropriate for your estate plan.

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