Living trust basics
Living trusts can form the backbone of your estate because it can accomplish many tasks both during and after your lifetime. Described simply, while a will can be pictured as a piece of paper with instructions on it, a living trust can be pictured as a box. There are typically four types of people named in a living trust:-
The grantor is the person(s) creating the living trust (also called a settlor or trustor) is the only person who may amend the living trust's language at a later time or revoke the trust. Married couples and common-law couples can be co-grantors.
A trustee manages the living trust's assets on a daily basis. The grantor often names him/herself the initial trustee of the living trust. By naming oneself grantor and trustee, the person creating the trust maintains the same control over his/her assets as before the trust was created.
The successor trustee(s) manages the trust If the initial trustee(s) is incapacitated or has resigned, very similar to a financial power of attorney. The successor trustee is also responsible for handling the transition and distribution of the estate once the grantor passes. Successor trustees act in a fiduciary capacity, meaning they are legally responsible for their actions.
View our successor trustee guide to learn more about their duties.
The beneficiaries are those receiving the benefits of the living trust. Initially, the grantor(s) is the beneficiary. Only after the grantor(s) passes do heirs become the beneficiaries.
Creating the trust
Consult an attorney to determine if a living trust is right for you. Parts of the living trust document resemble a financial power of attorney by listing the trustee's financial powers and limitations. Other parts resemble a will, such as the rules for distribution of the estate to heirs. Upon signing the living trust, the grantor may begin transferring assets into the living trust.Signing documents does not automatically transfer all assets to the living trust
Living trusts have a page that upon signing transfers all personal property without a title (vacuum cleaners, silverware, art, jewelry, etc). An itemized list is not required unless a specific personal item should be distributed to a particular beneficiary. Financial institutions such as banks will require viewing and copying documents in the living trust prior to transferring bank accounts into the living trust. New deeds must be signed and recorded to transfer property. Other assets, such as vehicles, may require title changes. This process is called "funding a living trust" - learn more about funding a living trust.Managing the trust
Once assets are in the living trust, not much needs to be done aside from maintaining a current list of assets and liabilities held both in the living trust and personally. A review of the living trust is good every few years. Living trusts are often written to automatically incorporate any new laws, though some new laws may lead you to make amendments. Financial institutions are not required to accept a power of attorney form (unless ordered by a court). However, financial institutions must recognize successor trustees if the asset is in a living trust, a benefit that can save both time and money.Distributing the trust
The distribution clauses do not go into effect until the grantor (or co-grantors if a married couple) have passed. The grantor may distribute assets before his or her passing (though beware of gifting taxes). The successor trustee is the key figure once the grantor passes. The transition of the estate is very similar to probate. Debts still need repayment, final tax returns need filing and assets liquidated before distribution. The time saved using a living trust can be exaggerated but in general it can be quicker because a court is not needed to oversee every step. The successor trustee's job is more bookkeeping than financial planning. Accurate records must be kept of all transactions in case a beneficiary has questions. Beneficiaries hold the successor trustees accountable for their actions. Family members, friends and corporate trustees (professional services) are all options to consider. Successor trustees can continue working with the grantor's financial, insurance, legal and accounting professionals in management of the trust's assets prior to distribution. The trust pays for any professional fees. The successor trustee may be instructed by the trust's instructions to hold and manage assets for young beneficiaries, beneficiaries with special needs or maintain a life estate for someone. Hence, your successor trustee should have the knowledge and/or resources to handle a variety of tasks. Once all the living trust's assets have been distributed, the trust may terminate.Other things to know:
Review
Grantors - create and amends the living trustTrustees - manage living trust assets for benefit of beneficiaries
Successor trustees - back up initial trustees upon death, resignation or incapacitation
Beneficiaries - benefit from the trust's assets; initially are the grantors
- Create a living trust - identify goals, produce and sign documents
- Fund a living trust - begin transferring assets to the trust
- Maintain a living trust - periodically review asset/liability checklist and ensure assets properly titled
- Distribute a living trust - begins only after last grantor has passed; successor trustee oversees transition which is similar to the probate process but without a court's oversight, which could have benefits or disadvantages depending on your successor trustee