Living Trust

What is a Living Trust?

A revocable trust (or a “living trust”) is a popular estate planning tool. As with any other trust arrangement, a living trust is an agreement between three parties: the settlor (or grantor), the trustee, and the beneficiary. The settlor is the individual who forms the trust and generally contributes property to the trust. The trustee is the individual or entity that administers the trust for the benefit of certain beneficiaries. The trustee must administer the trust property pursuant to the directions in the written trust agreement. The trustee has a fiduciary duty to the settlor and the beneficiaries to carry out the intent of the settlor in a fair and reasonable manner. A living trust may be amended in part or revoked by the grantor at any time during his lifetime.

The grantor or settlor (the trustmaker) can add or withdraw assets from the trust as he pleases. Because the grantor is also the trustee during his lifetime, he has complete control over management of trust assets. For tax purposes, all taxable income or tax losses generated by trust assets flow through to the grantor while he is alive. A living trust has negligible effect over a person’s management and enjoyment of his property during his lifetime.

The terms of the living trust are set forth in a written document. The trust document does not have to be recorded in the public records and does not have to be filed with any government agency. It is, therefore, a relatively private document between the parties. A revocable living trust does not need its own tax identification number so long as the grantor is alive and either the grantor or his/her spouse serve as the Trustee. To be given full legal effect upon the death of the settlor, the trust document must be properly executed with the same formalities as does a will.

Benefits of a Living Trust

The two most often cited advantages of a living trust are its role in the event of the grantor’s incapacity and the avoidance of probate upon the grantor’s death.

The living trust typically provides that in the event of the grantor’s incapacity a successor beneficiary automatically takes over the administration of trust property. Incapacity is a defined term within the trust document, and specific procedures for determining the grantor’s incapacity are set forth in the trust. The incapacity provisions of a living trust permit the grantor and his family to avoid a public guardianship in the event that the grantor becomes unable to manage trust property.

The other primary attraction of living trust is the avoidance of probate upon the grantor’s death. Probate is avoided because living trust property is not owned by the grantor at the time of death. As long as property is properly titled in the name of the trust, the property is not part of the grantor’s probate estate and can be transferred to trust beneficiaries without probate.

The mere creation of a living trust document provides no benefit to the grantor unless the trust is properly funded with the grantor’s assets. Only those assets whose title is transferred to the trust are protected in the event of incapacity or death.

In addition to provisions for incapacity and avoidance of probate, living trusts have other estate planning benefits. For clients with property located in multiple states, a living trust which owns all of the client’s property avoids multiple probate proceedings in the state where each property is located. The administration of a client’s real property is consolidated through the use of a single trust document.

Asset Protection and Living Trust

Some people mistakenly believe that living trusts provide asset protection for the trustmaker. In fact, a living trust has no asset protection of money or other assets that a trustmaker conveys to a living trust or money the trustmaker deposits in living trust bank accounts. It makes no difference that the living trust has a spendthrift clause which states that creditors cannot reach the interests of a trust beneficiary.

The reason is that a living trust is a type of “self settled” trust. A self settled trust is one where the person who creates and funds the trust, the trustmaker, is also a trust beneficiary. Florida law unequivocally provides that the beneficiary of a trust that the beneficiary creates for his own benefit is not protected from the beneficiary/trustmaker’s creditors even if the trust has a protective spendthrift provision.

A living trust may have substantial asset protection benefits for beneficiaries other than the trustmaker. If a living trust provides that upon the trustmaker’s death the remaining trust property is retained in the living trust for the benefit of the trustmaker’s spouse, children, or other beneficiaries then the money is protected from these beneficiaries creditors if the trust document has a properly drafted spendthrift provision.

A interest of a beneficiary other than the trustmaker is protected even if there is not a proper spendthrift clause if the trust is a “discretionary trust.” A discretionary trust is one where the trustee has complete discretion over the amount and timing of distributions to the beneficiaries of income and trust principal.

A living trust should always be drafted by an experienced attorney. In fact, the Florida Supreme Court has held that preparation of a living trust by anyone other than a lawyer constitutes the unauthorized practice of law.

Jon Alper

About Jon Alper

Jon is an attorney focusing on bankruptcy and asset protection in Orlando, Florida.