How do living trusts work? Many people have heard of a living trust, but not everyone knows how they actually work. A living trust is but one kind of trust, and is also known as a “revocable” trust. For many people, a living trust is the first, and sometimes only, trust they will need. At its heart, a living trust is a document that sets up the rules by which assets can be placed in trust for your benefit and the benefit of your heirs. If done properly, it can help your heirs by allowing them to avoid the probate courts when you pass away. This not only avoids the estate being subject to probate and the expense of probate court in general but also avoids publicizing the administration of your estate and keeps things confidential.
A living trust generally involves three types of individuals: (1) trustors/settlors, (2) trustees, and (3) beneficiaries. The same person can simultaneously be a trustor, trustee, and beneficiary, although living trusts are not always set up that way. A trustor is the individual who transfers property into the trust. A trustee is the individual who is responsible for managing the trust assets and following the instructions in the trust. A beneficiary is the person for whose financial and legal benefit the trust was set up.
Trusts vary greatly in how they are set up, even living trusts. That being said, many living trusts provide that while the trustor is alive, he or she (or they) will serve as trustee. This means that while you are alive, even though your assets are in the name of the trust and not your own name, you are still in charge. Many trusts then provide that when you pass away, the person you designate as your successor trustee is then in charge of your assets. However, the successor trustee has to follow your instructions contained in the trust. Most trusts provide that when you pass away the successor trustee is to pay your remaining expenses and then distribute what is left of the trust assets to your stated beneficiaries.
One of the greatest things about living trusts is how customizable they are. You can have more than one trustee if you want and more than one beneficiary if you want. If you are a married couple, you can customize what you want to happen when one of you dies and the other survives. One option in that scenario is some of the assets stay in a newly created trust for the surviving spouse, and the rest goes into a separate newly created trust for the benefit of the children. When the surviving spouse dies, what is left from his or her trust would go to the children. There are many other ways you can set it up, and consultation with an attorney will reveal the options that are right for you. Another great thing about living trusts is while the trustor is alive it can be changed, which is why they are sometimes called “living” trusts.
A trust is only of benefit if you actually put assets in it. In the case of a home or deposit accounts that is relatively easy. In the case of other assets that are not capable of being titled, a pour-over will is helpful. A pour-over will provides that assets that were not previously put in the trust will automatically go into the trust upon your passing.
The above is just a brief synopsis of how living trusts work. There are many options and issues to consider in the legal process not discussed above. The decision to create a living trust should be made in consultation with an experienced attorney licensed in the state you live in. While a simple living trust is sufficient for many people, other people may need other types of trusts, depending on their needs.
If you have any more questions or need any legal advice about living trusts or how to manage them, please contact us today for more information!