A living trust is a legal device that establishes how your property is to be transferred upon death, but goes into effect during your lifetime. The grantor, who puts his property into the trust, assigns a trustee to administer the trust on behalf of a beneficiary. There are several types of living trusts. In comparison, a testamentary trust is created by the terms of a will and does not go into effect until death. Living trusts avoid probate but testamentary trusts do not.
Revocable trusts require the grantor's property and assets to be retitled and redeeded to the trust. However, the grantor retains the right to change and revoke the trust at any time. This right is unique to revocable trusts. Revocable trusts do not avoid estate taxes. Property in trust is not protected from future creditors of the grantor during his lifetime. Additionally, if a beneficiary becomes divorced, his spouse my be entitled to property in the trust.
Assets placed into an irrevocable trust cannot be taken back by the grantor. However, a grantor is entitled to all trust income, such as interest and dividend payments. The grantor can change the trustee at any time. An advantage of an irrevocable trust is that after five years, property or assets in the trust cannot be used by Medicaid to offset payments for the grantor's long-term health care. This ensures that assets and property are inherited by beneficiaries and not used to pay for Medicaid. Additionally, estate taxes are avoided as capital gains are erased when the property is transferred to beneficiaries.
Specialized Living Trusts
There are many types of specialized trusts that can be created for unique situations. A "Special Needs Trust" is designed to have assets available to a beneficiary who is disabled. This type of trust can cover care beyond that which the government provides. A "Bypass" or "Q-Tip" trust is a means for a grantor to pass her entire estate to her spouse at death, tax free.
"Spendthrift" trusts were originally designed to leave assets to children with poor financial management skills. However, it is the only legal vehicle for a grantor to leave property to a beneficiary that cannot be reached by anyone but the beneficiary. In this type of the trust, the trustee can also be the beneficiary. However, this situation would likely result only if the financial management skills of the beneficiary are not a consideration. The trust can be written so a beneficiary's creditors cannot take property or assets held in the trust. Additionally, the trust can be created so a divorcing spouse of the beneficiary is not entitled to trust property.
Read More: Taxes & the Advantages of Living Trusts
Estate Planning Advantages
Establishing a living trust has advantages. You have the opportunity to discuss your wishes with your loved ones. A trust can be very specific about how your property will be divided and transferred. You also have the opportunity to speak to potential trustees and make sure your wishes are understood. Ultimately, a trust can provide peace of mind that your loved ones are cared for as you wish.
Marcus Schantz is an author and licensed attorney based in Chicago. He holds a Juris Doctor from the Northern Illinois University College of Law, as well as a Bachelor of Arts in anthropology and microbiology from the University of Texas at Austin.