QNA Trust

Living Trust: FREQUENTLY ASKED QUESTIONS

What is a living trust?

A trust is an arrangement under which one person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the trustee of your own living trust, keeping full control over all property held in trust. A trust can be revocable, meaning you have the right to change it during your lifetime, or it can be irrevocable, meaning that once you sign it, the trust cannot be changed.

A “living trust” (also called an “inter vivos” trust) is simply a trust you create while you’re alive, rather than one that is created at your death.

Different kinds of living trusts can help you avoid probate, reduce estate taxes, or set up long-term property management or management of cash and other personal property.

 

---

 

Why should I make a living trust?

The big advantage to making a living trust is that property left through the trust doesn’t have to go through probate court. In a nutshell, probate is the court-supervised process of administering your estate once you die, paying your debts and distributing your property to the people who inherit it. The average probate is quite costly and time consuming.

Another advantage of a living trust is that you, as the grantor/trustee of the trust, determine how the assets are handled even after death. For example, you may grant an outright distribution or you may put certain conditions in place for distribution, such as age or certain behavior, and you may dictate how the distribution may be used such as college education, support, maintenance or to start a new business.

Still, not everyone has to worry about probate, and some people don’t need a living trust at all. Minnesota allows for small estates, defined as estates under $50,000, to be collected by affidavit. Your attorney can walk you through this process and draft the necessary documents.

 

---

 

How does a living trust avoid probate?

Property you transfer into a living trust before your death doesn’t go through probate. The successor trustee — the person you appoint to handle the trust after your death — simply transfers ownership to the beneficiaries you named in the trust or otherwise administers the trust according to the directions you have specified.

 

---

 

Is it a hassle to hold property in a living trust?

Making a living trust work for you does require some crucial paperwork in order to fund the trust. For example, real property will need to be conveyed to the trust, accounts may need to be updated to name your trust as beneficiary.

 

---

 

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 a probate court, as do all the other documents associated with probate — inventories of the deceased person’s assets and debts, for example. The terms of a living trust, however, need not be made public.

 

---

 

Does a living trust protect property from creditors?

No. A trust is transparent to the creditor and bills must be paid accordingly, whether they are in your name individually or the name of the trust. If a creditor wins a lawsuit against you, the creditor can go after the trust property just as if you still owned it in your own name.

Generally, after your death, all property you own — including assets held in a living trust — is subject to your lawful debts. For example, if your house is held in trust and passes to your children at your death, the mortgage still needs to be paid. A creditor could demand that the trust pay the debt. On the other hand, probate can also offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they’re out of luck forever.

 

---

 

If I make a living trust, do I still need a will?

Yes, you do — and here’s why:

A pour over will is an essential device for property that you don’t transfer to yourself as trustee. For example, if you acquire property shortly before you die, you may not think to transfer ownership of it to your trust — which means that it won’t pass under the terms of the trust document. But in your pour over will, assets will be addressed that have not been properly titled to your trust.

If you don’t have a will or a pour over will to the trust, any property that isn’t transferred by your living trust or other probate-avoidance device (such as joint tenancy or beneficiary designations) will go to your closest relatives in an order determined by state law. These laws may not distribute property in the way you would have chosen.

 

---

 

Can a living trust reduce estate taxes?

A simple probate-avoidance living trust has no effect on taxes. More complicated living trusts, marital trusts, irrevocable life insurance trusts, to name a few, however, can greatly reduce the federal estate tax bill for people who own a lot of valuable assets.

More specifically, one tax-saving living trust is designed primarily for married couples with children. It’s commonly called an AB trust, though it goes by many other names, including “credit shelter trust,” “exemption trust,” “marital life estate trust,” and “marital bypass trust.” Each spouse leaves property, in trust, to the other for life, and then to the children. This type of trust can save up to hundreds of thousands of dollars in estate taxes, money that will be passed on to the couple’s final inheritors.