No matter how large or how small, upon death everyone has an estate. Your estate is comprised of everything you own; your car, home, other real estate, checking and savings accounts, investments, life insurance, furniture, personal possessions. To whom your estate is distributed depends on what you did before you died. In other words, your estate can be passed on by a Last Will and Testament, through a Trust, or according to the intestate laws because you had neither a Will nor a Trust. In order to ensure that your hard-earned assets pass to your chosen beneficiaries, it is imperative that you have either a Will or a Trust.
Perhaps the most common type of trust is the revocable living trust. As the name implies, revocable trusts are fully revocable at the request of the trust maker. Thus, assets transferred (or ‘funded’) to a revocable trust remain within the control of the trust maker; the trust maker (or trust makers if it is a joint revocable trust) can simply revoke the trust and have the assets returned. Revocable trusts can be excellent vehicles for disability planning, privacy, and probate avoidance.
As with any other trust arrangement, a living trust includes the settlor (or grantor), the trustee, and the beneficiary. The settlor is the one who forms the trust and generally contributes property to the trust. The trustee is the individual or entity that administers the trust for the benefit of the beneficiaries. When you first create your trust, you will probably be all three: settlor, trustee and beneficiary. In other words, you are creating a trust, that you will control, for your benefit. As time passes, a successor trustee may have to assume administration of the trust for you. Likewise, your loved ones will be designated as your beneficiaries. This is a life-evolving process.
Upon creation, the trustee must administer the trust property pursuant to the directions in the written trust agreement. The trustee has a fiduciary duty to the settlor (trustmaker) and the beneficiaries to carry out the intent of the settlor in a fair and reasonable manner. A living trust may be amended in part or revoked by the grantor at any time during his lifetime.
The grantor or settlor (the trustmaker) can add or withdraw assets from the trust as he pleases. Because the settlor/grantor is also the trustee during his lifetime, he has complete control over management of trust assets. For tax purposes, all taxable income or tax losses generated by trust assets flow through to the grantor while he is alive. A living trust has negligible effect over a person’s management and enjoyment of his property during his lifetime.
The terms of the living trust are set forth in a written document. To be given full legal effect upon the death of the settlor, the trust document must be properly executed with the same formalities as does a will.
Trust-based estate planning should also:
- Include instructions for passing your values (religion, education, hard work, etc.), in addition to your valuables.
- Include instructions for your care if you become disabled before you die.
- Name a guardian and an inheritance manager for minor children.
- Provide for family members with special needs without disrupting government benefits.
- Provide for loved ones who might be irresponsible with money or who may need future protection from creditors or divorce.
- Include life insurance to provide for your family at your death, disability income insurance to replace your income if you cannot work due to illness or injury, and long-term insurance to help pay for your care in case of an extended illness or injury.
- Provide for the transfer of your business at your retirement, disability, or death.
- Minimize taxes, court costs, and unnecessary legal fees.
- Be an ongoing process, not a one-time event. Your plan should be reviewed and updated as your family and financial situations (and laws) change over your lifetime.