Q: What is a living trust?

A living trust is an arrangement under which one person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the trustee of your own living trust, keeping full control over all property held in trust while you are alive and well.

A “living trust” (also called an “inter vivos” trust by lawyers who can’t give up Latin) is simply a trust you create while you’re alive, rather than one that is created at your death under the terms of your will. Living trusts can help you avoid probate, reduce estate taxes, provide asset protection to your heirs, and set up long-term property management.

Q: Do I need a living trust?

The big advantage to making a living trust is that property funded through the trust doesn’t have to detour through the probate court before it reaches the people you want to inherit it. In a nutshell, probate is the court-supervised process of paying your debts and distributing your property to the people who inherit it.

The average probate drags on for months (occasionally even years) before the inheritors get anything. And by that time, there’s less for them to get–in many cases, about 5% of the property has been eaten up by lawyer and court fees.

Q: How does a living trust avoid probate?

The grantor or trust maker will not own property in his or her individual name after their assets are funded into the name of the trust. Technically, they will be owned by the trustee for the benefit of the beneficiary – him or herself — or later beneficiaries. Because the grantor doesn’t personally own this property, probate is not required to transfer ownership to other individuals when he dies. All of this can be handled through the estate settlement process of which The Andersen Firm is able to guide and assist the successor trustee(s).

The trust does not die with the grantor or trust maker, but lives on as a separate legal entity.

Through the settlement process, the administrative or successor trustee named in the trust agreement will have the legal authority to step into the trust maker’s shoes after their death and can then take control of bank accounts, investment accounts, and business interests, collect life insurance proceeds, retirement accounts and annuities, pay the trust maker’s final bills, debts and taxes, and distribute the balance of the trust funds to the trust maker’s other beneficiaries named in the trust agreement — all without probate and court involvement.

Q: Is it a hassle to own property in a trust?

Making a living trust work for you does require some crucial paperwork. For example, if you want to leave your house through the trust, you must sign a new deed showing that your living trust now owns the house. And in a few states, you may need to use special language in your trust document to avoid wrinkles in your state’s income tax laws. This paperwork can be tedious, but the hassles are fewer these days because living trusts have become quite common.

Q: Is a living trust document ever made public, like a will?

No. A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate — inventories of the deceased person’s assets and debts, for example. The terms of a living trust, however, need not be made public.

Q: Does a living trust protect property from creditors?

Holding assets in a revocable trust doesn’t shelter them from creditors during life. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name. However, the assets you leave to your beneficiaries can be protected from their creditors if the inheritance is held in trust for their benefit.

Q: If I make a living trust, do I still need a will?

Yes, you do — and here’s why: A will is an essential back-up device for property that wasn’t transferred or retitled into your trust. For example, if you acquire property shortly before you die, you may not think to transfer ownership of it to your trust — which means that it won’t pass under the terms of the trust document. Your back-up (or pour-over) will leave any property to your living trust that you did not put into it before your death.

If you don’t have a will, any property that isn’t transferred by your living trust or other probate-avoidance device (such as joint tenancy) will go to your closest relatives in an order determined by state law. These laws may not distribute property in the way you would have chosen.

But any property left outside your trust will still require probate, even if your pour-over will sends the property into your trust at your death. You — not your trust — owned it at the time you died, so probate will be required to transfer the assets to someone or something that is still “living”. Your best option is to make it a point to transfer all newly acquired assets into your revocable living trust immediately.

Q: Can a living trust reduce estate taxes?

A living trust can greatly reduce the federal estate tax bill by creating what is commonly called an AB trust, though it goes by many other names, including “credit shelter trust,” “exemption trust,” “marital life estate trust,” and “marital bypass trust.” Each spouse leaves property, in trust, to the other for life, and then to the children. This type of trust can save up to hundreds of thousands of dollars in estate taxes, money that will be passed on to the couple’s final inheritors.