What is the Big Deal About Living Trusts?
Living trusts have become very popular estate planning and probate avoidance tools. Basically, a trust is an entity that only exists on paper but maintains the capacity to own assets. When you think of a trust, imagine a bucket or a chest that holds and manages assets until they need to be distributed. A trust can hold any type of asset, including but not limited to, bank accounts, securities, membership units or shares of Limited Liability Companies, Corporations, or Partnerships, life insurance policies, annuities, and real estate.
Generally, a trust is formed when a "Settlor" executes a trust document and appoints a "Trustee." A Settlor may appoint himself, a family member, friend, acquaintance or an independent trustee, such as a bank, an accountant or a lawyer to be the trustee or the trust. Once assets are transferred into the trust, the trustee assumes the rule of a fiduciary and manages and distributes the assets pursuant to the terms of the trust document. In the typical trust, the settlor will receive all income generated from the trust during his lifetime and at his death the assets in the trust are distributed to the designated beneficiaries in the manner set forth within the terms of the trust.
There are many advantages for the Settor during the Settlor's lifetime. If the Settlor elects to have independent corporate trustee, the Settlor will enjoy professional financial management of the trust assets. The Settlor can receive an income stream from the income of the assets in the trust and can invade the principal is necessary. The trust will keep and maintain clear title to all assets transferred into it. A trust preemptively contemplates and plans for incapacity of the Settlor by permitting the Settlor to appoint successor trustees.
There are also many advantages at the death of the Settlor. A trust avoids probate because when assets are transferred into the trust the trustee has deemed to have title of the asset. Additionally, a Settlor can avoid ancillary probate by transferring title to out of state property into the trust. A trust will dramatically reduce time and costs of probate administration where estates can take from 18 to 24 months to administer while trust income and principal can be distributed to the beneficiaries much more quickly. A revocable trust, because it is created during the Settlor's life, is not subject to any court supervision unless a beneficiary or a trustee petitions the court for some matter. While probate administration is public, the distribution and management of a trust is private. Further, a trust is more difficult to set aside through contest because any heirs will not likely be entitled to see the trust documents without incurring legal fees.