Living Trusts

What is a living trust?

A living trust is one that is created and becomes effective while you are still alive (as distinguished from a testamentary trust, which is created in your will and doesn't become effective until you die). It can be revocable, meaning that you can change it or revoke it; or it can be irrevocable, which means that you cannot change it without the court's permission. It is usually created by you, for your benefit, and names you as trustee. This means that you continue to have control over the trust property while you are alive, even though it is now owned by the trust - you can sell it, mortgage it, or do whatever else you want with it. On your death, the principal is distributed to the beneficiaries named in the trust and the trust ends.

A living trust can help avoid probate by transferring your property into the trust so it is not owned by you on your death. Your beneficiaries do not have to deal with the aggravation of going through probate and waiting up to a year before they receive the property. It gives you great flexibility with respect to managing your property - if you have a large estate, you can delegate the task of managing certain types of property to a named trustee while you simply collect any income off the property. And you can name a successor or co-trustee who will take over the management of the trust in the event you ever became incapacitated.

How does a living trust avoid probate?

A living trust avoids probate because the property is owned by the trust, not by you, so it is not in your estate when you die. But to avoid probate, the property must be placed into the trust before you die, if it doesn't happen until your death (done through a pour-over will), the property must pass through probate.

How do I create it?

You execute a written trust document (called a "declaration of trust"), which states your intention to hold specific property in trust for yourself or other named beneficiaries. The document usually contains the following information:

• Trustee: It most often will be you, but you can name a co-trustee to help you;
• Beneficiary: You are usually the income beneficiary; you also need to name a principal beneficiary, who will receive the trust property when you die;
• Assets: Include a list of the assets that will be placed in the trust.

You should also name a successor trustee who will distribute the property to the beneficiaries when you die. The trust also should set forth the trustee's responsibilities, including instructions regarding payment of income and principal to the beneficiaries.

How do I fund my trust?

To fund the trust means that you transfer property into it. If you are creating a living trust, you fund it by depositing money into the trust and transferring property into it. The trust's assets must be formally transferred into the trust so that they are owned by the trustee and not by you. To transfer the property to the trust, you have to change the property's ownership registration so that it is in the name of the trustee and no longer in your name. For example, if you want to put your stock account in trust, you need to change its ownership registration from "Mary Baker" to "Mary Baker, Trustee of the Mary Baker Trust." Personal property is usually transferred by a bill of sale and real property is transferred by deed.

TIP: To change the ownership registration to trust property, you will have to contact whichever company or agency issued the original title and ask for a new one in the name of the trustee. For example, if you are placing your bank account in the trust, give a copy of the trust instrument to the bank and ask it to change ownership of the account to yourself as trustee of the trust.

When do I fund the trust?

The trust can be funded during your lifetime, or through a pour-over will, which devises your property to the trust when you die. You can transfer assets through a pour-over will only to a trust that is created before or concurrently with your will. If you fund the trust during your lifetime, you avoid probate. But if you fund it through a pour-over will, that property is subject to probate.

What kind of property can I put into the trust?

You can include anything that you own and have the power to give away, including your interest in property that you own as a tenant in common with others. Examples include artwork, copyrights, real estate, and cash.

What duties do I have as trustee of my living trust?

Basically, you need to keep records regarding which property is placed into the trust; keep an accounting of income earned by the trust and expenses or payments made by the trust; maintain a separate checking account for the trust; and obtain insurance on the trust's assets.

What happens if I devise trust property to someone through my will?

Nothing. The property already belongs to the trust so you cannot give it away in your will.

When will my trust end?

Your trust will terminate on the date, or upon the happening of an event, that is specified by you in the trust instrument. For example, you may simply state that the trust is to continue until January 1, 2010. Or you may state that it is to terminate when your child turns 30. When the trust ends, the principal is distributed to the beneficiaries.

Can my creditors reach the trust's assets?

Yes. If the trust is revocable then you maintain a sufficient amount of control over the assets and therefore it is subject to your creditors' claims. To avoid this, you would have to make the trust irrevocable, because you would then retain little or no control over the trust property.

Can I change the terms of my trust?

Yes. You can amend or revoke your trust as long as the trust instrument states that it is revocable - this is important: you need to reserve a right of revocation in the trust instrument or it is presumed to be irrevocable. If the trust is revocable, you can change it however you like. You can add or remove property from it, change the beneficiaries, add a trustee, or change the terms - and you can make these changes for no reason other than a simple change of heart. If the trust is irrevocable, you will have to request the court's permission based on a change in circumstances.

TIP: If your changes are extensive, you should revoke the trust and start over.

Why would I make the trust irrevocable?

Whether you decide to make your trust irrevocable will depend on the purpose for creating the trust. Irrevocability leaves you with little control over the property after you place it in the trust, but it does have benefits that are not associated with a revocable living trust, which is usually designed to avoid probate and nothing more. For example, if the purpose for creating a trust is simply to avoid probate or relieve you of the task of managing substantial assets, then a revocable trust will accomplish that purpose. But if your estate is large, you might want to minimize federal estate taxes, or you might want to protect the assets from the claims of your creditors. To accomplish these purposes, an irrevocable trust will better suit your needs.

Does a living trust provide more privacy than a will?

Yes. The trust does not have to be filed so it never becomes a public record. You are insured privacy with respect to the identities of your beneficiaries, the assets of the trust, and the terms for distribution. A will, on the other hand, becomes a public record when it is filed with the probate court and can be viewed by anyone who goes through the trouble of looking it up.

Will my living trust help avoid estate taxes?

It depends on how the trust is set up. If it is a basic revocable living trust, it is still subject to estate taxes. If it is a tax-saving trust (such as an "AB trust"), it will provide federal estate tax savings.

Life Insurance and Other Property Passing by Contract

What happens to the proceeds of my life insurance policy when I die?

If you named a beneficiary in your policy, the proceeds will pass to that beneficiary without going through probate.

I don't want the beneficiary to receive the proceeds. Can I devise it to someone else in my will?

No. If you want to name a new beneficiary before you die, you must change the designation on the contract or the property will pass to the original beneficiary.

What happens if the beneficiary dies before I do?

If you named a contingent beneficiary, she will receive the proceeds. If you did not name one, the proceeds will pass with your probate estate - either through your will's residuary clause or under intestacy.

Are there any alternatives to naming a person as my beneficiary?

Yes. You can name your estate as beneficiary or you can set up a trust so that the proceeds are transferred into the trust instead of directly to a beneficiary (called a "life insurance trust"). The benefit of doing this is so you can specify how the proceeds are to be used: e.g., to support your family, pay for someone's education, or be applied towards expenses related to your death.

What about the proceeds from my IRA or 401k plan?

The proceeds pass to the beneficiary immediately on your death without passing through probate.

Joint Tenancy With Right of Survivorship

What is the difference between property owned in "joint tenancy with right of survivorship" and property owned in "tenancy in common"?

Joint tenancy property cannot go to anyone other than to the surviving joint tenant; tenancy in common property can be devised by your will or inherited by your heirs. In a joint tenancy with right of survivorship, the property passes to the surviving joint tenant on your death without passing through probate. In a tenancy in common, the property falls into your probate estate and passes to your heirs or beneficiaries.

Are there any disadvantages to owning property as joint tenants with right of survivorship?

Yes. You could lose the property to the other joint tenant's creditors. Or maybe she has plans for the property that you don't agree with (she may want to sell when you'd prefer to preserve property). To avoid these types of scenarios, be sure that the person is someone you trust before making her a joint tenant to your property.

Totten Trust Bank Accounts

What is a "Totten trust" account?

It is a bank account that you hold as trustee for another person (the beneficiary) selected by you. You have complete control over the money during your life, and when you die, the balance remaining in the account passes to the beneficiary without going through probate.

What if the beneficiary dies before me?

If she dies before you, the trust terminates. On your death the balance passes through your probate estate.

What if I spend all the money before I die?

If there is nothing in the account when you die, the beneficiary gets nothing.

How is this different from a joint bank account?

In a joint bank account, the joint tenant has rights to access the account while you are alive. The beneficiary of a Totten trust account has no rights to the account until you die, so she cannot access it while you are still alive. A joint bank account cannot be devised to another person in your will. A Totten trust account, however, can be devised under your will to a person other than the named beneficiary.

Custodial Accounts/Uniform Transfers to Minors

What is a "custodial account"?

It is a method of transferring property to a minor child pursuant to the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act (depending on which is adopted by your state). Basically, you leave a gift to the minor by transferring the property to another (the "custodian") who manages the property until the minor turns 21, at which point the property is distributed to the child.

TIP: Remember that under the annual gift tax exclusion, the first $11,000 of the gift is tax-free.