Living Trusts

A trust is a legal relationship that allows property to be held by one party for the benefit of another party or parties.  A trust is created by a Settlor, also referred to as a Grantor, Trustor, or Maker, who transfers property to a Trustee. The Trustee holds, invests, and manages that property for the beneficiaries designated by the Settlor in the trust agreement. The Trustee also distributes trust property to the beneficiaries pursuant to the terms of the trust agreement.

All trusts are classified as either a testamentary trust or a living trust. A testamentary trust is one that does not become active until the death of the Settlor. Typically, a testamentary trust is triggered by a provision in the Settlor’s Last Will and Testament. A living trust, formally known as an “inter-vivos” trust, activates when all formalities required for the creation of the trust are complete and the trust is funded. Living trusts can be further divided into revocable and irrevocable living trusts.

As the names imply, a revocable living trust can be revoked or terminated by the Settlor at any time and for any reason whereas an irrevocable living trust cannot be revoked or terminated by the Settlor once the trust is established. Some estate planning goals can only be achieved with an irrevocable living trust while others call for a revocable living trust.

Living trusts are commonly found in an estate plan due in large part to the fact that they can help achieve such a wide range of estate planning goals. Among the most common uses for a living trust include:

• • Protecting assets
  • Probate avoidance
  • Incapacity planning
  • Pet planning
  • Medicaid planning
  • Protecting the inheritance of minor children
  • Special needs planning

A trust agreement is the name of the legal document used to create a trust. Within the trust agreement are the terms, created by the Settlor, that dictate how the trust will operate. The overall purpose of the trust will also be found in the trust agreement. This is important as it may be referred to if there is a conflict or dispute during the administration of the trust. Trust administration refers to the Trustee’s job of overseeing the terms of the trust in action. Generally, the more complex and/or valuable the trust assets are the more time-consuming and complicated it is to administer the trust.

The Trustee of a living trust is responsible for administering the trust. Trust administration, in turn, requires the Trustee involves numerous duties and responsibilities, such as:

• • Following all trust terms unless they are illegal, impossible, or unconscionable.
  • Managing trust assets.
  • Investing trust assets using the “prudent investor” standard.
  • Communicating with trust beneficiaries.
  • Distributing trust assets.
  • Keeping trust records.
  • Preparing and filing trust taxes.
  • Defending the trust agreement against legal challenges.
  • Making discretionary decisions about distributions (if applicable)

One of the most common mistakes Settlors make when creating a trust is to appoint someone close to them, such as a spouse or friend, as the Trustee of their trust without considering if the person is the right person for the job. While the fact that you trust someone to act with the best of intentions is important, it is not a sufficient reason to appoint someone as your Trustee given the complex nature of trust administration.

Ideally, your Trustee should have experience in the legal and/or financial field because many of the Trustee duties require a knowledge of law and finance. Instead of simply appointing someone you “trust” as your Trustee, appoint someone who can administer the trust efficiently and economically. You may even wish to consider appointing a professional Trustee.