Living Trusts

 

What is a Trust?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A trust is an arrangement in which a person or entity (the “trustee”) holds legal title to assets transferred to it by another person or entity (the “grantor”, “settlor” or “trustor”) for the benefit of one or more beneficiaries.  The trustee agrees to use the assets pursuant to the settlor’s directions.  These directions are often embodied in a written known as a “Declaration of Trust” or a “Trust Agreement”.

 

What is a Living Trust?

 

A living trust is a trust created during the settlor’s lifetime to manage the settlor’s assets during the remainder of his or her life and then, after the grantor’s death, distributes or manages said assets for the benefit of the settlor’s family members or beneficiaries.  A frequent version of the living trust is that the settlor is the trustee of his or her trust to maintain full control over all property held in trust, then a successor trustee is named by the Trust Agreement after the settlor’s death to manage or distribute the remaining assets.

 

A living trust can be “revocable”, meaning it could be altered or revoked during the settlor’s lifetime, or it can be “irrevocable”, meaning it cannot be changed or eliminated once established.  Normally, any revocable living trust will become irrevocable upon the settlor’s death.  There are advantages and disadvantages to either a revocable or irrevocable trust.  For example, a properly drafted irrevocable trust can help trust assets avoid estate taxes, but a significant drawback is that the terms of the irrevocable trust cannot be altered even as life circumstances change.

 An attorney can help review your wishes and your assets and determine if a living trust, whether revocable or irrevocable, can best suit your estate planning needs.

 

What are the Advantages of a Living Trust?

 

1. Avoiding Probate – Ordinarily, assets that are owned by a person in his or her name alone at the time of death, the “estate”, can only be transferred to heirs by legal process through the probate court.  Probate can be a lengthy and expensive process depending on the value of the estate and the type of assets owned by it.  Even a person who dies “testate”, meaning with a will, may have their wishes known but must still have assets in their name only pass through the probate process.  However, placing assets in a living trust is a method to avoid the hassles of probate.  When a person dies and his or her assets are owned by the living trust, the trustee simply distributes the trust assets according to the decedent’s wishes as laid out in the Trust Agreement.

 

2. Privacy – Estates that pass through probate become public record available for anyone to view at the courthouse.  Court proceedings are public and often the distribution of the assets is subject to supervision by the judge or the probate registrar.  A living trust is not subject to public disclosure and the distribution of the trust assets can remain a quiet and private affair.

 

3. Avoid Estate Taxes – The estate tax is a tax on your right to transfer property at your death.  Congress sets the threshold for the value of an estate to be subject to estate taxes (e.g. for decedents dying in 2014, an estate exceeding $5,340,000 was subject to federal estate taxation), and that threshold changes yearly to sometimes be higher and sometimes be lower.  Assets placed in an irrevocable trust generally do not count towards the value of the estate since the property cannot be retrieved by the settlor.  This could be significant savings of money if your assets are close to the federal threshold for estate taxes.

 

4. Continuity of Management – Should the settlor die or become incapacitated, the named successor trustee takes over the management of assets.  This reduces the chances of improper management of trust assets by giving the settlor the power to pick a competent successor.

 

5. Extended Control – Trust property can be maintained in the trust after death instead of outright distribution to beneficiaries that may not yet be able to manage their affairs themselves due to young age, illness or incompetence.  Settlors can create provisions such as “Son A receives his share upon the age of 21” or “Son B receives X dollars upon marriage”.  The settlor can be very general or very specific in his or her instructions to the trustee in managing assets, almost to the extent of “ruling from beyond the grave”.

 

6. Flexibility – A living trust can be drafted to accommodate the wishes of the settlor under existing circumstances but also provide flexibility for changing circumstances.  Family members pass on, new family members are born and often the settlor’s wealth may change for better or worse during the passage of time.  This may also be true for the trust assets long after the settlor’s death so the Trust Agreement can include direction for the trustee under changing circumstances or to simply allow the trustee discretion to maximize the benefits of your trust for your loved ones.

 

What are the Disadvantages of a Living Trust?

 

1. Cost – A living trust is often more expensive and time consuming to establish than simply establishing a will.  In addition, a living trust requires more maintenance as assets move in and out of the trust.  In addition, Michigan has simplified probate processes in the last several years for small estates and it is possible that the cost of probate could be lower than establishing a living trust depending on your circumstances.

 

2. Potential Incomplete Funding – When a living trust is established, it must be “funded” meaning that the settlor’s assets must move from the settlor’s name into the name of the trust.  This includes real property, personal property, stocks and bonds, bank accounts and anything else that could be subject to probate if left in the settlor’s name.  It is often wise to back up a living trust with a will in the event that the settlor leaves assets behind that must go through probate.  A “pour-over will” can be devised to back up the trust and decree that the property remaining in the decedent’s estate is distributed to the trustee of the living trust.  Although it is possible that the living trust may not achieve the goal of probate avoidance due to incomplete funding, a good estate plan will have safeguards to ensure that the client’s wishes can still be followed.

 

3. Amendments or Termination of the Living Trust – Depending on the terms of the Trust Agreement, it can be more of a hassle or expense to modify or terminate the Trust than to simply draft or amend a will.  In addition, if a trust is terminated before the settlor’s death, the trust assets would have to be re-titled back to the settlor in his or her name.

 

An experienced attorney can help you make the determination whether a living trust is an appropriate estate planning tool for your circumstances and draft a living trust that is fully consistent with your wishes and desires.