What Is A Living Trust?
A trust is a legal entity, similar to a corporation, LLC, or another person. The person who sets up the trust is called "Settlor." The trust exists separately from the Settlor, and can own assets. A Living Trust, also known as an Inter Vivos Trust, is a trust created during a person's lifetime to hold the Settlor's assets.
What Are The Benefits Of A Living Trust?
There are many benefits to setting up a Living Trust. For example, A Living Trust:
- Helps avoid the high costs and drawn out procedures of Probate Court after Settlor's death
- Allows to safeguard Settlor's financial privacy
- Allows a parent to control the distribution of assets to his or her minor children
- Allows the Settlor to specify how he or she will receive funds in the event of incapacity
How Does A Living Trust Provide All These Benefits?
To explain how a trust works, it's best to use an example. Let's use Marge Simpson.
Let's say Marge is single, and has 3 minor children. She owns a house, titled to "Marge Simpson, a single woman." If she were to die, the house that she currently owns would be left without an owner. Thus, the Probate Court would have to step in and figure out who does the house belong to now that Marge is dead. The court would eventually figure it out, but not without a cost. The lawyer and the estate's personal representative would have to be paid for their time. Their payment would come from Marge's estate (reducing her children's inheritance).
There are two types of fees that the personal representative and the lawyer would be able to collect to administer Marge's estate. The first type is called "ordinary fees." The amounts here are set by a statute, and are calculated as a percentage of the gross value of the estate - which means that if the house is worth $600,000, but Marge only has $100,000 of equity in the house, the court will take a percentage of the $600,000, and not $100,000. The actual percentages vary with the size of the estate. However, the costs for a $600,000 estate can exceed $30,000.
In addition to the "ordinary fees" that are dictated by statute, the lawyer and the personal representative may petition the court to collect "extraordinary fees." These fees are not set by statute, and can be as high as the judge would approve.
How Do The Assets Get To The Trust?
The process of transferring the assets into the trust is called "funding." During this process, "Marge the Individual" ceases to be the legal owner of the assets, and instead transfers ownership to "Marge, Trustee of Marge's Revocable Trust." The actual steps involved depend on the nature of the asset.
Funding of real estate is accomplished by signing a deed where the person-owner of the property gifts the property to the trustee of the Revocable Trust. So, in our example, "Marge the homeowner individual" would sign a deed transferring the ownership of her home to "Marge As Trustee Of Marge's Revocable Trust." The transfer is valid at the time the deed is executed. (This transfer does not trigger real property tax re-assessment, as this is a transaction that merely changes the way in which title is held, and thus no actual change of ownership takes place).
Individual assets that do not have a title (like household furnishings) are transferred into the Trust in bulk. This is accomplished by listing "Household Furnishings" in a list attached as an Exhibit of the Trust. Since a Trust Exhibit is a part of the Trust, it becomes valid at the time of creation of the Trust (so, at the time the Trust document is signed and notarized), and no further steps are necessary.
Can The Asset Owner Still Exercise Control Over The Assets?
Absolutely. By definition, a Living Trust is a Revocable Trust - thus, the settlor retains the power to revoke the trust. As the power of revoke is the greatest power that is possible, it includes within it all of the lesser powers (to modify, for example).