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, 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 (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 typically 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 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 his 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 each state where property is located. The administration of a client’s property is consolidated through the use of a single trust document.

Some people mistakenly believe that living trusts provide asset protection. In fact, a living trust provides no asset protection benefits in Florida and most other states. A living trust should be drafted by an attorney. In fact, the Florida Supreme Court held that preparation of a living trust by anyone other than a lawyer constitutes the unauthorized practice of law.

©Jonathan B. Alper, Attorney at Law, Orlando (Heathrow), Florida