A trust, like a corporation, is a legal entity that exists only on paper but is legally capable of owning property. A person, called a trustee, must be in charge of the property. You can be the trustee of your own living trust, keeping full control over all property legally owned by the trust. Deposits made to a trust account must be payable to the trust and personal businessmust be conducted in a separate personal account.
There are many kinds of trusts. A "living trust" (also called an inter vivos or a loving trust) is simply a trust you create while you're alive, rather than one that is created at your death under the terms of your will.
All living trusts are designed to avoid probate. Some may help you reduce estate taxes and others let you set up long-term property management.
A revocable trust is a trust in which the person setting it up retains the power to change or cancel (revoke) the trust in his or her lifetime.
An irrevocable trust is one that cannot be changed or cancelled once it is set up.
What is a Testamentary trust?
A Testamentary trust is part of your will and becomes effective after your death. Assets in your name after you die that are not distributed directly to beneficiaries (POD) named on the account or asset can pass into the trust.
Assets that transfer into the trust first go through probate. A portion of assets that go through probate will be used to pay any taxes, creditors and other expenses that you owe. Remaining assets then can go into the trust to be distributed to or managed for named beneficiaries.
The primary advantage of this trust is the avoidance of administrative steps during your lifetime such as placing assets in the name of a trust ? a requirement for a living trust.
Why would someone need a living trust?
If a person doesn't take steps to avoid probate, after their death, their property will probably have to go through probate court before it reaches the people they want to inherit it. Probate is the court-supervised process of paying your debts and distributing your property to the people who inherit it.
Probate can drag on for several months before the beneficiaries get anything. By that time, there is less for them to inherit. In many cases, about 5% of the property has been eaten up by lawyers and court fees. The exact amount depends on state law and the rates of the lawyer hired by the executor.
Not everyone has to worry about probate and many people don't need a living trust, e.g. if you have very little property or your property falls under the state's probate exemption. Most states allow a certain amount of property to pass free of probate, or through a simplified probate procedure often referred to as a Small Estate Process.
How does a living trust avoid probate?
Property transferred into a living trust before death doesn't go through probate. The successor trustee (the person appointed to handle the trust after the grantor's death) simply transfers ownership to the beneficiaries named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyers or court fees to pay. When the property has all been transferred to the beneficiaries, the living trust ceases to exist.
Is it expensive to create a living trust?
Lawyers may charge upward of $4,000 or more to draw up a moderately complex trust. Even simple trusts can run to $1,000. Hiring a lawyer to draw up a living trust might run as much now as heirs would have to pay for probate after the grantor's death. The primary issue when evaluating the need for a living trust is the complexity of potential assets and the need to move quickly after the passing of the assets owner.
In some cases, a Payable on Death (POD) or beneficiary added to a non-trust account may be a FREE option to avoid probate in the event of the account holder's death. Beneficiaries have no access to an account and are unable to perform transactions while an account holder is alive but are able to close an account with appropriate ID and a death certificate.
Is a living trust document ever made public, like a will?
No. A will becomes a matter of public record when it is submitted to probate court, as do all the other documents associated with probate including an inventory of the deceased person's assets and debts. The terms of a living trust, however, are not a matter of public record.