Chapter 6 Living Trusts

• Library: Estate Planning Basics (Nolo) (2024 Ed.)

CHAPTER 6 Living Trusts

How a Living Trust Works

Do You Need a Living Trust?

Living Trusts and Taxes

Income Tax

Estate Tax

Living Trusts and Young Children

Shared Living Trusts for Couples

Making Key Decisions About Your Living Trust

Choosing Property to Put in the Living Trust

Choosing the Trustees of Your Living Trust

Naming Your Trust Beneficiaries

Arranging for Payment of Debts and Taxes

Preparing Your Living Trust Documents

The Trust Document

Transferring Property Into Your Trust

A living trust allows you to do the same basic job as a will—that is, leave your property to the beneficiaries you choose—with the major plus of avoiding probate. Formally, a living trust is a legal document (normally, just a few pieces of paper) that controls the transfer of property in the trust after you die. In the trust document, you name beneficiaries to receive the trust property. As with a will, you name primary beneficiaries for specific property, residuary beneficiaries, and alternates for both.

For many years, living trusts have been a popular method for transferring property without probate. They are very flexible. You can transfer all your property by living trust, or if appropriate, use one to transfer only some assets, leaving the rest by other methods.

Another plus is that living trusts are rarely made public after the trust maker's death. Wills, on the other hand, become part of the public record during the probate process.

Living trusts are called "living" because they're created while you are alive; you legally transfer property to the trust when you create it. And they're called "revocable" because you can revoke or change them at any time and for any reason before you die. While you live, you still effectively own all property you've transferred to your living trust and can do what you want with that property, including selling it, spending it, or giving it away.

Aside from some paperwork necessary to establish a living trust and transfer property to it, there are no serious drawbacks or risks involved in creating or maintaining a living trust. For example, unlike other trusts, you don't need to obtain a taxpayer ID number for the trust or maintain separate trust tax records. All transactions that are technically made by the living trust are reported on your personal income tax return.

A living trust can work as effectively for a couple as for a single person. With a couple, each member can create their own separate trust. More commonly, though, a couple creates one shared living trust to handle both their shared ownership property and any property either owns individually. Because most couples who use living trusts are married, the discussion that follows uses the terms "spouses" and "marital property." However, the concepts discussed apply equally to unmarried couples and their shared property.

How a Living Trust Works

Here are the basics of how a living trust works. In the trust document, you name:

• the property in the trust
• the trustee, who has authority to manage the trust property (you name yourself as the initial trustee; if you establish a shared trust, you and your spouse are the initial trustees)
• the successor trustee, who will distribute the trust property when you die
• the trust beneficiaries, who will receive the property you've left them when you die, and
• other terms of the trust, including the fact that you can amend or revoke it at any time.

Then you formally transfer property into the trust. When you die, your successor trustee simply obtains the property and transfers it to your beneficiaries. No probate or other court proceeding is required.

Living Trust Terms

The person who sets up a living trust (that's you) is called the "grantor," "trustor," or "settlor." If you establish a shared living trust with your spouse, you are both grantors. The grantor creates a written "trust document" (or "instrument"), containing all the terms and provisions of the trust.
The property you transfer to the trustee acting for the trust, is called, collectively, the "trust property," "trust principal," or "trust estate." (And, of course, there's a Latin version: the trust "corpus," meaning the "body" of the trust.)

To place some types of property in your trust, you must formally transfer the property's title to the trust—technically, into the name of the trustee. (See "Transferring Property Into Your Trust," below.) If the trust doesn't become the official legal owner of property, that property is never validly included in the trust, and so can't be transferred from it when you die. Instead, that property will go to the residuary beneficiary of your will, or if you don't have a will, it will pass to a family member according to the intestacy laws of your state. In either case, it will go through probate.

With any property having a document of title, such as a house, you must prepare a new ownership document—with a house, this means making a new deed. For example, to transfer his house into a living trust, Julio Menendez would prepare a deed, stating that he personally transferred the house to "Julio Menendez, as trustee of the Julio Menendez Living Trust." Julio must then file the real estate deed with the county recorder's office—or whatever the official land records office is called in his state.

Some types of valuable property, including jewelry or art, as well as items such as household possessions or clothes, don't normally have documents of title. In that case, the property is transferred to the living trust simply by listing it in the trust document and stating that the property is owned by the trust.

The magic of the living trust is that, although it is really only a legal fiction during your life, it assumes a very real presence for a brief period after your death. When you die, your living trust can no longer be revoked or altered. Because property held in a living trust doesn't need to go through probate, the successor trustee can promptly transfer that property to the trust beneficiaries.

After your death, your successor trustee will need to complete some paperwork to finalize the transfers, such as new real estate deeds or other documents required by state law. The successor trustee will probably need to hire a lawyer to prepare those documents. Additionally, the successor trustee may need to:

• Obtain a written statement of the market value of trust real estate as of the date of death of the grantor. Trust real estate receives a "stepped-up basis" to its market value as of the date of the grantor's death. (See "The Federal Income Tax Basis of Inherited Property" in Chapter 9.)
• Provide essential trust information to all trust beneficiaries. Many states have specific requirements about what information must be included—another reason a lawyer may be necessary.

After the successor trustee has met all legal requirements and has distributed the property to the beneficiaries, the trust ends. No formal...