A living trust, also known by its Latin name “inter vivos” meaning “among the living,” is a type of legal document that grants assets of some kind to a beneficiary under a specific set of circumstances. Unlike their opposite, testamentary trusts, living trusts are established during the lifetime of the person giving the assets away, also known as the grantor.
One interesting feature of a living trust is that it can allow the grantor to use the assets within the trust while they are alive. This use of assets can occur if the grantor chooses to make their living trust revocable. As the name implies, a revocable trust can be dissolved at the grantor’s request. If this happens, all of the profits generated by the assets will return to the grantor along with their assets. This type of trust is typically very flexible, allowing the grantor to adjust the terms of the trust as they see fit.
The alternative form of a living trust is an irrevocable trust. In an irrevocable trust, once the agreement is signed, the grantor no longer owns the assets. Legally, the assets pass to the intermediary who is bound by fiduciary duty to manage the trust until the time that it passes to the intended beneficiary.
Living trusts are one of many options open to an individual during the estate planning process. There are many considerations to take into account when deciding on a revocable trust, an irrevocable trust, or simply establishing a testamentary trust.
A testamentary trust is a trust that takes effect after the death of the grantor. Since the grantor must die to establish the trust, it is inherently irrevocable. Testamentary trusts are not actually created by the grantor. Instead, the grantor leaves instructions for the executor that they must establish this trust for the beneficiaries. Since the testamentary trust is constructed after the death of the grantor as part of the will, it will be the subject of scrutiny by the probate court along with the rest of the will. This can lead to a delay in the trust’s creation and may be counted in the assets of the grantor when determining estate taxes. Testamentary taxes can also be used as part of a workaround of estate taxes.
A revocable living trust’s primary advantage over a testamentary trust is that it is already in effect at the time of the grantor’s death and it has been customized during the grantor’s life to fit their needs. Additionally, the use of the revocable trust’s income and assets means that the grantor has not suffered a true loss of wealth. However, this is also the first drawback of the revocable living trust.
Since the grantor has had full use of the revocable living trust, the trust is fully counted in the assets of the grantor on their death. While the probate court may not need to approve the trust’s transfer, the value of the trust will count against their estate tax exemption.
By contrast, an irrevocable living trust is not counted against the assets of the grantor upon their death since they signed over ownership of the assets upon the creation of the irrevocable trust. Additionally, unlike a testamentary trust, an irrevocable living trust does not need the approval of a probate court to pass to a beneficiary since it is not technically part of the last will and testament. The drawback of the irrevocable living trust is that since it is no longer part of the grantor’s assets, the grantor has far less access, control, or use of the assets within the trust.
Knowing the best type of trust to establish to match your needs and your wants for your beneficiaries is a complex undertaking. If you want to establish a testamentary trust, revocable living trust, or irrevocable living trust, you will need the help of a trusts & estates attorney.
An experienced trusts & estates attorney can consult with you and explain the benefits and drawbacks of each kind of trust in the context of your personal estate. Then, after weighing the costs and benefits, your trusts & estates attorney can draft a trust agreement that complies fully with all local, state, and federal laws while maximizing the value of your estate that is passed on to your beneficiaries.
