How does a living trust work?
Like a corporation, a trust is regarded in law as something separate from the people who create it. Therefore, a trust can hold property, sue and be sued, enter into contracts and conduct business in its own name. The assets and liabilities of a trust are separate from the assets and liabilities of its beneficiaries. A trust can obtain its own taxpayer identification number and file its own tax returns.
When you transfer assets to a living trust, those assets no longer belong to you (even though they may be under your control if you are the trustee). It is this shifting of assets to a new owner that enables a living trust to avoid probate and avoid some kinds of creditor claims.
How is a living trust viewed for income tax purposes?
During your lifetime, any living trust created by you is disregarded for tax purposes. That is, the income of the trust is reported on your personal income tax return. A living trust does not file its own separate tax return until after you die. Therefore, typically, a person would not apply for a taxpayer identification number for a living trust until after the death of the grantor.
How is a living trust viewed for estate tax purposes?
A living trust is also disregarded for estate tax purposes. Just because assets held in trust avoid probate does not mean they avoid estate taxes. The assets of your living trust will be included in your estate for the purpose of determining if any estate taxes are owed. It is possible for a pair of living trusts to be set up to minimize estate taxes for married couples, but this makes for a highly complex and
technical living trust agreement which is only required for people having an estate in excess of the federal unified credit against estate taxes. The amount of this credit is $2,000,000 in 2007 and 2008, and $3,500,000 in 2009. The living trust agreement we provide does not include any estate tax planning, so it is not designed for people who have estates larger than the credit against estate taxes.
What is probate?
Probate is the legal process of transferring your assets to your heirs and paying any debts you owe after your death. The process is administered by a probate court judge and is a function of state law.
How does a living trust avoid probate?
A living trust avoids probate by transferring your assets now, during your lifetime, to the trustee. At your death, the assets already belong to the trust, so they are not included in your probate estate.
How do I transfer property into my living trust?
At the back of your trust document there will be a schedule for you to complete which lists the items of property you want to transfer to the trust. For non-titled assets, it is generally sufficient to list these items specifically (my diamond ring) or as a group (all my jewelry). But some things, like bank accounts and investment accounts, cannot be transferred this way. You may still want to list them in your asset schedule, but in addition to that you will need to contact your financial institution and make a formal change of the names on your account, or open
new accounts. Only when this is done will these kinds of assets be transferred into your living trust.
Are there some kinds of assets I should not transfer to my living trust?
Possibly. Some common examples include insurance policies, retirement plans, and jointly held assets. Both insurance policies and retirement plans have a beneficiary designation procedure which normally allows you to name a primary and a secondary beneficiary. People often name a spouse or children as primary beneficiaries and their living trust as a secondary beneficiary. There may be reasons to avoid naming the trust as a beneficiary at all, such as when you want a particular benefit to be distributed in a different manner than your trust assets. Jointly held assets usually don't need to be transferred to your living trust because the joint owner gets those assets in full automatically by operation of law. However, joint assets are not sheltered from creditor claims. If you have questions about what assets to put into your living trust, check with your financial advisor.
Does having a living trust mean I don't need a last will?
No. You still need a pourover will to collect any assets not transferred to your trust during your lifetime, and transfer them to the trustee so your distribution plan can be put into effect. In addition, there are some things you cannot do in a living trust, which can only be done in a last will, such as naming a guardian for any minor children.
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