Terminology: Living Trusts

Creation of a Living Trust allows one to transfer one's assets (home, bank accounts, stocks, personal property, vacation homes, business interests, etc.) to a Trustee who manages the transferred assets for your benefit and use while you are living. The initial trustee is typically the same person who transferred the asset in the first place: you. In a typical Living Trust arrangement, you fill a variety of roles: first, you are the Grantor (the person who transferred your asset into the trust), second, you become the Trustee (the person who now manages the assets transferred into the trust) and third, you become a beneficiary of the trust (the person who gets all of the benefit from the assets held in the trust). To be valid, however, the trust will need to name additional beneficiaries (your spouse, children, charities, etc.) The IRS does not consider this type of trust (a Revocable Living Trust) as a separate, taxable entity. You are taxed on your income and property as if the trust didn't even exist. Upon certain events, such as your death, the tax status of such a trust will change.

Now why would anyone go to the trouble of complicating the ownership of property in such a way? There are a number of purposes, but a primary reason is that by doing so, it becomes much easier to turn the management of the property in the trust over to someone else during your own lifetime if you no longer are able to handle its management because of age or disability. Creating a trust also allows you to specify how you want your property to be distributed upon your death (similar to a Will). However, a trust can endure for decades after your death in order to provide financial support for your spouse, your children, your favorite charities or even for your pets if desired. If all of your assets are held in trust, you also have the benefit of avoiding the probate (or court) process for distributing your assets at your death. While "avoiding probate" is not as crucial as it once was - the courts have gone to great lengths to simplify this process - it can still be beneficial to avoid it in many circumstances. However, probate can provide important benefits in other circumstances.

It is important to speak with an attorney about whether a living trust is appropriate for you. Everyone's circumstances are different and in some cases, a living trust may not be the best choice. Be wary of anyone who recommends a one-size-fits-all solution to your estate planning needs. There really is a reason that attorneys spend years in school and are certified by State Bar associations before being admitted to the practice of law. Estate planning can be full of traps for the unwary.