Provided by Carol Anderson, Anderson Wealth Advisors
What is a living trust?
A living trust is a separate legal entity that you create to own property for you (like a house, boat, or mutual fund shares). You transfer all or some of your property to the living trust as soon as it is established (this is called funding the trust). People generally adopt living trusts to avoid probate entirely or to pass specific property outside the probate process, but it is also a tool you can use to give someone the power to manage your property for you if you become incapacitated. The following is a limited discussion about how a living trust can be used as such a tool. There are many other factors about living trusts that you may also want to consider.
How does a living trust work?
If you name yourself trustee or cotrustee with another (e.g., your spouse) and, usually, a successor trustee while you retain capacity, you retain total control over the property that has been transferred to the trust. Depending on the terms of the trust, you can take that property back at any time, use that property, change the terms of the trust, add or remove beneficiaries, replace the trustee, or even revoke the trust entirely.
If incapacity strikes, the successor trustee (the person you named to run the trust if you can't) takes immediate control of your property to use it for your care and support, or in whatever way you have directed by the terms of the trust. Upon your death, your property is held in trust or distributed according to your wishes.
Technical Note: A living trust may also be referred to as an inter vivos trust or revocable trust.
Caution: In some states, you need a cotrustee to have a valid living trust.
Tip: You should execute a durable power of attorney (DPOA) at the time you create your living trust. Be sure your DPOA includes a provision that authorizes the transfer of your property to the trust. This will give your personal representative the ability to fund the trust if you have been unable to complete your plans to do so before your death.
Tip: A living trust usually becomes irrevocable when you become incapacitated. This means that the successor trustee cannot revoke or change the trust, unless the trust agreement specifically authorizes the trustee to amend the trust or certain provisions of the trust.
What are the advantages of a living trust?
Avoids the need for guardianship because the trustee takes control upon incapacity
Your successor trustee takes immediate control of the property in the trust as soon as you become unable to do so for yourself.
Allows you to control your property until you become incapacitated
If you are the original trustee, you continue to handle your own affairs as if you still owned the property in your own name. Authority does not transfer to the successor trustee until it is necessary.
Allows you to name someone who is qualified to manage your property
A cotrustee or successor trustee should possess honesty, integrity, and sound business judgment. Your successor trustee may need expertise if you have a business interest, real estate, or a large portfolio of stocks or securities. You name the person you want and trust to manage your financial affairs if you should become unable to do so for yourself.
Is a living trust right for you?
Can be expensive and burdensome to implement
A living trust is available to anyone and there is no dollar requirement for setting one up. However, because you need to consult with an attorney, the cost of creating, implementing, and managing a trust can be high. It may not make sense to go through the bother and expense unless the value of your property is significant. In addition, transferring property to a living trust can be complex and burdensome.
What does a living trust need to say to be effective in case of incapacity?
Your living trust must be designed to protect your property and provide for your support during a period of incapacity. Among others, your living trust should contain the following provisions.
That income is to be distributed to or for your benefit
Although you may understand that this is one of the purposes of your living trust, be sure to specifically direct the successor trustee to take care of you while you need it.
That gift-giving authorization is given, if desired
This power may be important because it allows the successor trustee to continue your estate and tax planning (by taking advantage of the annual gift tax exclusion or by Medicaid planning, for example).
That management of any business interest be delegated to family members or other qualified persons
This specific direction will ensure that your business will be delegated to someone you trust to carry it on for you.
Example(s): Hal has built a business empire and acquired a fortune during his 70 years of life. He's still able to manage his affairs, but is worried that his ability will diminish in the future. Hal loves his business and wants to keep control of his empire as long as he is able to manage it.
Example(s): Hal's best friend and personal secretary, Dick, has been by his side for the last 40 years. Dick is like a member of the family and knows the business almost as well as Hal. Dick dotes on Hal's children.
Example(s): Hal's attorney sets up a living trust, naming Hal as trustee and Dick as successor trustee. The terms of the trust provide that the trust property be distributed to Hal's children at his death.
Example(s): Hal continues to run his business empire until his health begins to fail and his ability to manage declines. Dick succeeds Hal as trustee and runs the trust according to its terms. At Hal's death, Dick distributes the property in the trust equally among Hal's children.