Living Trusts

Living trusts are legal entities with the help of which a property owner known as the grantor can transfer property to another party (trustee) to manage his possessions while he is alive or at death. The trustee can be another property owner or a corporation, such as a bank, being responsible for administering the grantor’s assets according to the written instructions that the trust document contains (Sitarz, 2002). The trustee owes the grantor a fiduciary duty and has a legal title to the property. The grantors put their assets, such as houses, stocks, and bank accounts, into trusts, which manage the belongings for their benefit during their lifetime and later serve the interests of their dependents when the grantor dies. Living trusts allow the grantor to distribute property to the people he favors even after his death. These agreements allow a person to control assets, whether being alive or at death, through the trustee he appoints (Fleming, 2001).

In most cases, people choose trustees, which become responsible for managing the assets of their trusts. The arrangement enables owners to maintain control of valuable possessions during their lifetime even though they put their assets into trusts. People responsible for living trusts can select a successor trustee to manage assets of the trust if they become unwilling or unable to administer it. The grantors can choose different people as trustees, including adult children, spouses, domestic partners, business associates, family friends, relatives or professional fiduciaries. The professional fiduciary can be a registered or licensed individual of a trust company or a company that has obtained a license from the state (Phillips & Phillips, 1999). The paper argues that living trust provides the best option for people who own property of a high value and want to manage it while they are alive, passing its management to beneficiaries of their choice at death.

Living trusts are highly beneficial for two categories of people. They include people in need of financial assistance and those unable to manage their assets. Trusts help to manage assets for adult children who are are unable to control large sums of money and valuable assets. It also helps the disabled who lack the ability to manage their affairs, as well as people with a large number of creditors (Ashar, 2010).

Living trusts help to avoid probate, which is a legal process the courts follow to pay debts and distribute assets when the property owner dies without naming the beneficiary of the estate. Probate has various disadvantages (Sharp, 2010). It is expensive in terms of executor fees, legal fees and other costs that the beneficiaries must incur before distribution of property. The heirs might face different types of probate if the person owned property in various states. It is also time-consuming because it takes between nine months and two years (Dobris et al., 2003). The courts freeze all assets during the probate period to make accurate inventory. Moreover, probate is a public process, which denies the heirs privacy. The interested parties can access the information about the amount of assets the person owned, affecting actions of beneficiaries and creditors. Disgruntled heirs and unscrupulous solicitors can take advantage of the process. The probate process denies the beneficiaries control over the asset distribution. It determines the time it will take, the information that the public can access, and the cost. Living trusts avoid probate because the trustee owns the property. They provide an easy and relatively inexpensive way of planning an estate (Phillips & Phillips, 1999).

How Living Trusts Work

Every state has different requirements for setting up living trusts. People who seek to establish a living trust execute a document explaining that they are creating a trust to hold assets for their benefit and that of their family or whichever individuals they name as beneficiaries. Some declarations outline the major assets, such as investments and houses, that the grantor will put into a trust while referring to a schedule in which the exact property will be listed, initiating the trust (RIBA, 1997). The grantor can also transfer the assets to the trustee according to the trust agreement. The three options offer the grantor the discretion to subtract and add ownership to the trust. The grantor changes the titles of the assets, such as bank accounts, brokerage accounts and title deeds, for names of the trusts (Riedel & RIBA, 1997).

The trustee obtains property ownership when the grantor puts assets into a living trust. The transfer of ownership from the grantor to the trustee is the reason for changing the property’s titles from the grantor’s name for the trustee’s. The grantor still retains the right to enjoy and use property. The grantor has the duty to remit tax to the tax authorities to utilize assets under the living trust. The grantor holds the responsibility to report about the income from trusts according to income tax returns. The trust also files a separate income tax statement for the property. Nevertheless, the Internal Revenue Service (IRS) does not require income tax statements from the trust if the owner of the property still serves as the trustee (Vile, 2010). In such a case, the trustee should apply to the IRS for the trust’s employer identification number.

Property owners can assign anyone their trustee. They can also name a successor trustee, who is an alternative trustee responsible for the property management in case of incapacitation or death of the original trustee. One of the types those legal documents is the revocable living trust. In this trust, the grantor reserves the right of management of their property regardless of its possession by the trustee. The living trust gives the grantor the right to change the property in the trust, reassign the trustee, and modify the terms of the trust at any time. In case the grantor dies, the alternative administrator follows the terms of the trust to distribute property (Levy et al, 2000). Most grantors name their adult children or surviving spouses as alternative trustees. They can also name a trust company or a bank if they have the willingness to pay their fees.

Trusts can be in the ascendant long after the death of the grantor. The grantors, who want their infant grandchildren to benefit from the trusts, specify the trustee to make gifts for the children until their full age. The living trusts provide the grantor with considerable flexibility in property distribution. The grantor’s instructions in the living trust might tell the trustee to continue managing the property for another person’s benefit, distribute the assets to the beneficiary that the grantor chose or combine these actions. In case the grantor’s recipients of the living trust die before the grantor, and he had not named contingent beneficiaries to receive gifts, the assets revert to the grantor (Sharp, 2010).

The grantor should retain the right to amend or revoke the trust at his own discretion. The lawyer of the grantor should create a revocable trust agreement to allow the grantor change the trust terms or revoke the trust if it becomes troublesome. The living trust becomes irrevocable after the grantor dies. Though setting up a living trust is more involving, the payoff to the beneficiary comes when the grantor dies, avoiding the burden of the probate process.

A living trust may contain other separate trusts to make property distribution more flexible. If, for example, a grantor plans to distribute assets to the minor children, he can specify in the agreement that the property for children goes to a different irrevocable children’s trust. The grantor can create separate trusts for many beneficiaries in order for the assets in the living trust to be distributed at the grantor’s death.

Funding a Living Trust

Funding a living trust involves transferring the title of assets to the trustee. If the grantor wants to finance the agreement before their death, they transfer their assets’ title to the name of the trustee. The grantor transfers ownership of the assets they are putting into a trust to the trustee. The property under control of the trust avoids probate (ABA, 2004).

The process of transferring the titles to the trustee includes re-registering the title documents. For example, the grantor transfers the title of the stocks and bank accounts to the name of the trustee. The grantor also prepares and signs new deeds to their land or house, indicating the trustee as the owner. The grantors, who doubt their knowledge of these procedures, should consult their lawyers. The grantor should keep a record of the transfers to ease the job of the successor trustee after their death.

The Rights of the Beneficiary of a Living Trust

The Right to Accounting and Other Information

The trustee should regularly communicate with the beneficiaries as the trust indicates or dictates the circumstances. The administrator should regularly inform the heirs about major decisions concerning the trust. The decisions may include the exchange or sale of major assets, the trustee fees, and professionals that the administrator hires. He should also reveal the amounts the trustee distributes to beneficiaries, including major expenses and other matters that directly concern the beneficiaries. In case the trustee fails to communicate with those parties, or the beneficiary believes that the trustee takes actions without offering sufficient information, the beneficiary reserves the right to seek relief by petitioning the appropriate probate court. The living trusts are not under the probate court’s jurisdiction, though section 45a-175(c) of the C.G.S. indicates that investigation of those agreements can intervene in certain situations (Levy et al., 2000). It states that the probate courts can order the trustee of a living trust to provide an accounting if there is a sufficient proof that the following circumstances are true. If the beneficiary holds significant interest in the trust; the conditions have shown the necessity of accounting unless the beneficiary does not request an accounting on grounds of harassment.

The Right to the Trust Instrument Copy

The beneficiary of the trust is eligible to obtain a copy of the trust instrument from the trustee. If the trustee refuses to supply the copy to the beneficiary, he/ she may apply to the appropriate superior court or the trustee in order to compel the disclosure. The court reserves the discretion to either grant or deny the request. The court grants the request if the beneficiary sufficiently proves economic interests in the trust. In such a case, the beneficiary should have direct knowledge of the living trust’s terms.

The Right to Require Income or Principal Distribution

The conditions of a particular case and the provisions of the trust determine whether the beneficiary of a living trust has the right to oblige the trustee to distribute income or principal to the recipient. For example, most family trusts have provisions for mandatory income payment only to a surviving spouse. Thus, principal amounts, as the trustee determines, are reasonable and appropriate. In case a surviving spouse does not receive the mandatory income payments, he/she can seek a court order to oblige the trustee to make the income payments. However, the court may interfere with the decisions of the trustee concerning the discretionary principal payment. Such a situation will happen if the tribunal hears all the relevant facts and concludes that it amounts to an abuse of the trustee’s discretion (Connecticut, 1969). It is always prudent for the beneficiaries to consult a knowledgeable attorney before filing an application in the court to require such payment.

Advantages of Living Trusts

Help in Property Management

According to living trusts, the trustee manages the property of the grantor on his/ her behalf. The grantor receives income from the property less the trustee’s fees, not being burdened with the assets management. The living trusts provide a means of caring for the grantors and their property in case they become disabled. Thus, a person needs to establish a revocable living trust, fund the trust and name an alternative trustee to manage it if the grantor becomes ill. The living trust avoids the red tape, delay and high costs of guardianship that the courts order. The trustee can also take over the duties the person had, providing for his family members (Fleming, 2001). When the grantor dies, the trustee gathers the assets, pays claims, taxes and debts and distributes assets according to the grantor’s instructions without the court’s approval or supervision.

Protection of Privacy

The living trusts maintain the privacy of the deceased better than wills (Sharp, 2010). Living trusts remain confidential to uninterested parties. Only interested parties, such as the beneficiaries, have the right to know the trust instrument’s contents. Living trusts are more confidential since they do not require public records. The exception to the privacy is when the pour-over provision in the will funds the trust. In such a case, the items transferred from the probate estate may appear in public records. The privacy may further reduce if an interested party contests the will. Some states require registration of the trust if the grantor includes certain kinds of property, such as securities, real estate or safe deposit box, in the agreement. The registration creates a public record of the contents of the living trust. However, a grantor can avoid this requirement by using a nominee partnership.

Good for Distant Family and Assets

If the owner of a property, such as an estate, wants a person belonging to the a different state to manage the property, a living trust is a better option than a will. A living trust does not have to meet the habitation requirements certain state laws impose on its executors (Ashar, 2010). Many attorneys recommend that people, who hold property in one state and live in another one, create a living trust to hold the title to the property. The living trust helps the property owner to avoid complicated, costly and time-consuming probate procedures.

Easy to Create and Amend

The procedures that most states require for the creation of a living trust according to the estate objectives of the property owner are simple. They do not require following the formalities of executing or changing a will (Vile, 2010). Some states require a simple process of the living trust registration within the state. Most states do not need a witness or a religious leader for the amendment or execution of living trusts. The creation of a living trust requires the simple process, involving the property owner or a lawyer. It consists in writing the trust and signing it by the property owner.

Disadvantages of Living Trusts

Set-up Costs

Though setting up a revocable living trust does not necessarily require a lawyer, it is advisable to procure an attorney’s counsel to help establish the terms and conditions. The creation of a living trust requires payment of registration fees and other incremental costs (Dobris et al, 2003). The cost-saving procedure accrues from the death of the grantor when it eliminates probate costs.

Tax Problems

According to the federal estate tax, an estate can use different a year from the calendar year to manage tax deadlines. The living trusts do not enjoy the same flexibility. People with large estates, which consider timing as a major factor, save money choosing a will instead of a living trust. Most state laws require trusts to make estimated tax payments whereas estates enjoy a tax exemption for the first two years. For example, the state of Maryland levies trusts income taxes, but exempts estates (Maryland, 1918). In such a case, the properties named in living trusts make tax payments while the estates that are not under trusts do not make the tax payments.

Less Protection

A trust administration does not provide protection of the claims period unlike the estate administration. It also does not offer an expedited alternative for the court to settle disputes arising from construction of documents or issues concerning the beneficiaries’ status. If the parties bring these issues of trust administration to the court for determination, it may result in additional costs and delays in the execution of the trusts. In situations that may cause controversy, estate administration is better than a living trust (Ashar, 2010).

Title Problems

Some items are hard to transfer to trusts. For example, if a person transfers the title of a car into a trust, they may face challenges in obtaining insurance since they have transferred ownership. The property owners, who have their assets in living trust, may face complications in securing a loan against the property in trusts (Sitarz, 2002). The lenders may require the owners to take the property out of the trusts before they release the loans against the possessions.

People Who Do Not Need a Living Trust

Some categories of people will gain insignificant benefits from having a living trust. For example, young married couples who do not have children and significant assets will not benefit from such legal documents. If these couples intend to bestow their assets on one another in case one dies earlier, they do not need to put their assets into living trusts. People who do not own significant assets and have modest estate plans also may not benefit much from living trusts. The last categories of people who do not need living trusts are those who prefer courts to supervise the administration of their estate. However, people with assets of a high value need a trust the most. A living trust is crucial if the property owner dies suddenly after an accident or illness.