A Living Trust can also be called by its common name, a “revocable living trust.”
It is called “revocable” because you can alter your trust or estate plan at anytime during your lifetime and even revoke the entire trust if you choose.
It is described as “living” because the Living Trust operates during your lifetime AND survives you at death to distribute your assets per your request. This is in contrast to a Last Will and Testament, which only has legal effect upon your death.
It is a “trust” because it creates an entity into which assets can be placed for normal use during your lifetime and then be available for distribution to anyone you select after your death.
To avoid probate, a person or a married couple can place assets in “trust” while keeping full control over their property. The trust has actual ownership of the property although you own the trust and control the assets in the trust throughout your lifetime.
HOW A LIVING TRUST WORKS
Although it may sound complicated at first, the person who purchases a Living Trust wears three hats:
As noted above, you are the settlor of the trust—meaning simply that the trust belongs to you. You also manage the assets which are placed into the trust. Thus, the settlor is also called the trustee of the Living Trust. After your death, your “successor trustee” takes over the management of the trust assets.
Finally, the settlor and the trustee (who are the same person) is also named as the beneficiary of the trust. The beneficiary is a person who will benefit from the trust during his or her lifetime. Since you have created the trust, manage its assets, and benefit from the trust, you are called the settlor, trustee and lifetime beneficiary of the trust.
- • Settlor
- • Initial Trustee
- • Lifetime Beneficiary
The Successor Trustee
The settlor is able to designate the person(s) who will administer the trust after he or she dies. Called the “successor trustee,” this is the person with whom the settlor places the responsibility for managing and distributing the assets placed in the Living Trust.
The settlor will designate in the Living Trust how he or she wants his or her estate to be divided. The person(s) named by the settlor to receive the assets after death are called the “contingent beneficiaries.” When the settlor dies, the contingent beneficiaries are entitled to receive the settlor’s assets according to the wishes of the settlor.
Remember, the settlor is entitled to make any kinds of changes to the trust during his or her life. This can include adding new beneficiaries, removing existing beneficiaries, changing the distribution of assets or even selling the assets and revoking the trust.
In the example below, Bob Smith established a Living Trust. He will pay no probate fees and his estate will not go through probate at all because he created a Living Trust during his lifetime.
During Bob’s Life
Settlor is Bob Smith
Trustee is Bob Smith
Beneficiary is Bob Smith
After Bob Dies
Settlor is None
Successor Trustee is Jane Smith
Beneficiary is Jane Smith
When Bob dies, his wife, Jane, takes over the administration of his trust because Bob designated Jane to be his “successor trustee.” Bob also designated Jane to receive his assets after his death. As the example illustrates, Jane is a “contingent beneficiary” of Bob Smith’s Living Trust.
During his lifetime, Bob Smith is the only person who benefits from the trust. At Bob’s death, the designated successor trustee takes over and distributes Bob’s assets according to his wishes.
Establishing a Living Trust enables an individual or family to transfer property to the trust without giving up management or control. Unlike an “irrevocable” trust (which can’t be changed), the Living Trust gives you all the benefits of a trust instrument, but does not take away your control over the assets or ability to benefit from those assets.
A Living Trust avoids probate because, unlike a Last Will and Testament, it is a fully effective document which exists now, during your lifetime. Equally important, your Living Trust continues to exist after death as a separate entity. Since there is no probate, there are no fees to be paid to attorneys, executors, appraisers, Courts, etc. Everything you leave goes directly to whomever you have chosen.
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