A living trust, or inter vivos trust, is created for the benefit of another party during the settlor's life. Most people use living trusts to avoid the expensive and time-consuming court-monitored probate process. Property left in a living trust passes to beneficiaries without probate.
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A living trust essentially transfers the trust property to the beneficiaries within a few weeks of the settlor’s death, while probate can take much longer.
A living trust must be signed by the settlor and a notary. The document lists the property in the trust, the trustee, and the beneficiaries. The trustee manages and administers the settlor’s property. The settlor typically serves as the trustee while he or she is living and assigns someone to take over for him or her upon death. While any competent adult can serve as a trustee, many wealthy individuals instead choose a bank or trust company.
After the trust document is created, the settlor must transfer the property he or she wants covered by the trust into the trust. For most items, this merely involves including a list of property with the trust document. Titled property, however, such as real estate, must be retitled in the name of the trust. This must be done correctly to avoid probate and generally requires additional time and fees.
An individual can make a living trust without a lawyer, but the larger and more complicated the estate, the more a lawyer may be beneficial. A well-executed trust allows the settlor’s accumulated property to continue to grow for generations. Many financial advisors recommend drafting the trust in conjunction with a pour-over will to capture any assets not captured by the trust.
A revocable trust allows the settlor to retain sole control of the trust. Most trusts are revocable because life circumstances change. While the settlor does not receive any tax benefits from a revocable trust, the settlor can withdraw funds from the trust, or alter or cancel the trust at any time.
Revocable living trusts are similar in many ways to wills. Like wills, revocable living trusts allow the settlor to name beneficiaries, leave property to young children, and revise the document as life circumstances or the settlor’s desires change. However, revocable living trusts include several benefits that wills do not.
Unlike a will, a revocable living trust avoids probate, reduces the chances of a court dispute over the settlor’s estate, avoids conservatorship, and remains private after the settlor’s death. But, unlike a will, a revocable living trust cannot name guardians for minors, name managers of minors’ property, name an executor, or dictate how debts and taxes should be paid.
Revocable living trusts are also useful for married couples with separate property acquired prior to the marriage, since the trust helps segregate those assets from community property. Revocable trusts can also be used to regulate a guardian’s spending habits for the benefit of the settlor’s children. Another benefit is that they can be used to name another person to act on the settlor’s behalf, should he or she become incapacitated.
An irrevocable living trust is a trust that cannot be revoked and that takes effect during the settlor’s life. The trustee of an irrevocable trust is given sole control over the trust property. Typically, the trust will not come to an end until the trust purpose is fulfilled. The trust may be altered or revoked before this time only with the consent of the trustee and all beneficiaries. These trusts cannot be terminated once they are finalized.
Irrevocable trusts are distinguishable from revocable trusts, which can be terminated up until the settlor’s death. The two most common motivations for making an irrevocable trust are to reduce taxes and to protect property.