One of the biggest mysteries to many of my estate planning clients is the concept – and purpose – of a living trust. At its core, a trust is simply a contract between a grantor (the person creating the trust) and the trustee (the person/entity managing the trust property) for the benefit of a beneficiary who, in a living trust scenario, will also be the grantor. As a side note, the grantor will also serve as trustee in many living trusts because the goal is to avoid probate, not to avoid creditors (that’s a whole different discussion). A “living trust” is a trust created during the grantor’s lifetime (no matter what the trust is called, it can always be boiled down to the basic concept that it’s simply a contract).
Basic trust concepts
So how does a living trust work, and how does it avoid probate and taxes? The trust “works” by basically having the grantor convey property to the trustee who holds the property on behalf of the trust, thus transferring ownership from the grantor to the trust. The trust avoids probate because upon the grantor’s death, the grantor does not own the asset(s) transferred to the trust so there is no need to transfer the property through probate. When the grantor dies the trust still owns the property, but now that the *beneficiary* has died the contingent beneficiary (the “contingency” is the death of the primary beneficiary) now has the “benefit” of the trust property and a successor trustee manages the trust property for the contingent beneficiary.
What does that mean for me?
The nuts and bolts of who does what (i.e., who is the successor trustee or the contingent beneficiary), and what happens with trust property depends on the purpose of the trust. In this discussion, avoiding probate is the purpose. So let’s consider a hypothetical – I want my office condo to go to my children but do not want it to pass through probate:
I create a living trust (i.e., draft a contract to that effect), and I execute a deed for my condo from me to the trustee of the living trust (also me). My trust names my oldest child as the successor trustee and my children as contingent beneficiaries upon my death. At a later date I die. Per the terms of the trust my eldest is now the trustee (and the trust document states this), and the trust provides that upon my death the new trustee sells the trust property and conveys the proceeds from the sale to the contingent beneficiaries and then the trust terminates. Probate is avoided with respect to the condo because I did not own it at the time of my death!
Is it really that simple?
Yes and no. Trusts are contracts, and when the person creating the trust has died the trust document is all that remains to tell the world the intentions, terms, and conditions of the trust and management of trust property. Using a cookie cutter trust from a website, or a preprinted trust binder from a company that mass produces them (and beware attorneys that use these preprinted “fill in the blank” templates as well) is never a good idea. I encourage my clients to weigh the costs of planning now against the time and costs to their heirs of probate (there are misconceptions about probate which will be addressed in other posts), and the advanced planning costs can be much less than probate later. However, this is always specific to each client’s situation and only with a thorough discussion can an estate planner properly assess the benefits of a trust. Trusts are not for everyone in every circumstance, and they can be oversold because they generally do involve higher upfront fees/costs. If you wonder if a living trust is right for you, schedule a free brief telephone meeting today.