February 2014 – The Living Trust

Is This Planning for You?

 First of all, why do people call this trust “living”?  It’s a document comprised of words, not flesh and blood.  It has no brain waves, no independent thoughts of its own, no separate personality.

I suppose people might identify this as “living” because its creators must be alive when they put those words on paper.  Perhaps it is because the greatest benefit comes when it continues on beyond the physical lifetimes of those who breathed life, compassion, foresight and flexibility into its pages.

I suspect the real reason it is described by the adjective “living” is because of its legal Latin name of “inter vivos”.  Its translation means “during life.”

Valuable Benefits

A living trust is the legal arrangement whereby one person – the trustee – holds legal title to property for the benefit of another person – the beneficiary.  While there are many kinds of trusts, the trust that is often used as a will substitute is the living trust, (also referred to as the inter vivos trust, grantor trust, or revocable trust).  By whatever name it is called, this legal instrument has great benefits for those who use it.

Best Interests:  The primary fiduciary responsibility of the trustee is to carry out his/her duties so that the best interests of the beneficiaries are served, not someone else’s or because it might be more convenient for the trustee.  To this end language in the trust should provide that trust income can be used to hire expert assistance, purchase liability insurance for the trustee and cover all expenses incurred by the trustee.  Not everyone you might want to serve as trustee has all the knowledge and spare time to adequately fulfill everything that needs to be done.

Prudent Investing: In many cases, the trustee and primary beneficiary is the same person, especially in the early years of the trust.  In these instances the investment policy is simply, “What is the risk tolerance of the beneficiary?”  In subsequent years, especially when the original primary beneficiary has died, the investments of the assets may change because of the needs of the new beneficiaries.

Perhaps it is the surviving spouse who needs all the income he/she can get for living expenses.  Perhaps it is for the children still going to college or just starting out in life.  Depending upon the financial needs of the beneficiaries, the trustee must fashion a prudent investment policy.  To this end the trust document must allow wide discretion for the trustee.

Fair and Impartial Treatment:  While all men may be created equal – at least according to the founding documents of our great country – not all the needs of beneficiaries are equal.  A living trust can take this into consideration when it distributes income to various beneficiaries.  While it cannot play favorites between the beneficiaries, it need not treat the beneficiaries the same if their needs are different.

However, this discretion must be spelled out explicitly in the trust document or the trustee may be the target of a lawsuit.  The benefit is that help and assistance are given to the needful beneficiary just as if the creator of the trust had been there to respond to this new but anticipated need.

Protect and Preserve:  Perhaps the first thing a trustee needs to do when he/she is entrusted with responsibility for a trust is to figure out what the trust owns, then collect and protect it for the benefit of the beneficiaries. He should make a checklist of all the things to do – e.g., if there is a house, change the locks;  pay the taxes and insurance; pay the mortgage. He should also begin an inventory of the assets and where they can be found.

In most instances the assets may already be owned by the trust, but in others these must be identified and re-titled in the name of the trust.  Under the best of circumstances, these assets are identified already in a document attached to the descendants Will and “poured over” into the trust either for subsequent distribution or further investment.

Charitable Designations:  A warming and comforting thought for many charitably minded people is that those nonprofits which look to them for financial support during their lifetimes are not immediately cut off just because they are no longer present to personally write a check.  Language in the trust document can instruct the trustee to continue to support these three to four favorite charities from the assets remaining in the trust as long as the trust remains in effect.  It’s like having one’s own personal foundation to endow one’s charitable interests.

Avoiding Probate:  Finally, avoiding probate may be the most beneficial reason to create a living trust.  Probate has been called the “tollgate” through which the decedent passes ownership to his/her heirs under a Will.  Not only does probate require time on the part of the executor – six to nine months – but also creates unnecessary expense – three to five percent of the estimated value of the estate.  A living trust avoids all the time and spares the expense of probate, because the assets it owns pass to the heirs outside of this probate process.

Funding the Trust
It’s a good thing that people believe living trusts can do great things for them. So they go to the expense and spend the time to create a trust, but then they don’t take the next step and fund the trust by transferring ownership of their possessions over to the trust.  Perhaps it is the thought of becoming the beneficiaries of their “stuff” and no longer owners that prevents them from taking this last and necessary step.

Everything the “settler” (originator or creator of the trust) owns in his or her individual name can be put into the trust.  This may include bank accounts, brokerage accounts, real estate and expensive items such as paintings, antiques and precious stones.  These items should then be listed on a separate document called “Schedule of Assets”.

Big ticket items, such as those listed above, belong in the trust. Other smaller value assets can be placed into the trust through language in the Will called a “pour-over provision.”  The executor of the Will (who is often also the trustee) will gather these assets and then “pour over” these possessions into the trust. They will then either be distributed to the heirs or, if the assets are to be liquidated, further invested.

Assets which should not be placed into the trust are those which pass by law through other means. These include things such as joint tenancy or transfer on death (TOD) accounts.  Also, you do not transfer to the trust things such as pension and retirement plans, stock options, life insurance and annuities.  With these you merely need to designate your living trust as the beneficiary.

In conclusion, we hope these insights into the use of living trusts are informative and helpful. This kind of thoughtful estate planning, which has many benefits, should not be put off until later, simply because that “later” may never come.