Any discussion about living trusts should properly start with a definition of the term. A living trust is a legal entity that is created and holds title to assets during the life of the person who places assets inside the trust. That person is known as the settlor.
The trust is created by executing a trust agreement, and transferring the settlor’s assets to the trust. The trust holds title to the assets. However, even though the settlor relinquishes title to the assets, the settlor still retains control of those assets. A trustee appointed by the settlor manages the trust assets. In most cases, the settlor is also the initial trustee. As the trustee of the trust, the settlor continues to have the same power to buy, sell, transfer, and otherwise control the trust assets.
Illustration #1: John executes a trust agreement, thereby creating a living trust. John then transfers title to his house to himself, as the trustee of his trust. John is both the settlor and the initial trustee in this example. Although the trust now holds title to John’s house, John still retains control of it.
The trust is revocable, which means that it may be modified or terminated by the settlor for so long as the settlor is alive and competent to make a contract. In some sophisticated estate plans, it may be desirable to create one or more irrevocable trusts, but irrevocable trusts are beyond the scope of this chapter.
Parties to a Trust
As we saw in Illustration #1 above, a person who creates a revocable trust may serve dual functions simultaneously. The settlor is the person who creates the trust. (The Internal Revenue Service refers to the settlor as the grantor, and to the trust as a grantor’s trust.)
The trustee is the person who handles the administration of the trust. When a trust is first created, the trustee is usually the same person as the settlor. When a married couple creates a trust, both spouses usually serve as the co-trustees.
The surviving trustee is the person who continues to manage the trust after one of the original trustees has died. The surviving spouse is typically the primary beneficiary as well as the surviving trustee. A successor trustee is a person or entity that is named to succeed the surviving trustee upon death or incompetence. The successor trustee has the same powers as the original trustees.
For a trust to be effective in avoiding probate, all of the settlor’s assets should be placed inside the trust. Assets may include bank accounts, real estate, and motor vehicles. The process involves simply changing the title to the assets to the trust. The person who controls the assets does not change, only the title to the assets does.
Except for real estate deeds, transferring assets into the trust should have no cost. The settlor is the person who (with the assistance of counsel where necessary) places the assets into the trust, and is the same person who has the right to also transfer those assets from the trust. Assets acquired after the trust is created should also be titled in the name of the trust.
Illustration #2: John sells his house after it has been transferred into the trust, and he buys another. The new house should also be titled in the name of the trust.
Because the settlor owns nothing solely in his name (all of the assets were placed in the trust), there is nothing to probate upon his death. If the settlor is married, the surviving spouse typically becomes the surviving trustee and, as such, continues to have the same power to buy, sell, or transfer the assets. Upon the death of the surviving spouse, the same situation applies as before. Since no assets were in the name of the deceased, there is nothing to probate. The trust document will identify who is to act as the successor trustee upon the death of the surviving spouse.
Types of Trusts
The trust document can take one of several basic forms. The two most basic forms, however, are the A Trust and the A-B Trust. There are other forms of trusts (such as the A-B-C Trust), but they are best left to be explained by estate planning counsel retained for that purpose.
The form that best suits a particular situation will depend on the person’s marital status, the value of the estate, the applicable estate tax exemption amount, and the potential distribution desired for the heirs. The exemption amount is the amount that can be transferred without the imposition of estate tax.
The use of a revocable trust in an estate plan can avoid probate and facilitate the quick and efficient distribution of estate assets after death. For this reason, every person owning assets should consider creating a living trust.
The above article is an excerpt from Estate Planning in Arizona: What You Need to Know, 2nd Edition (Wheatmark, 2019), by Donald A. Loose, republished with the author’s permission.
Disclaimer: Laws change constantly. Specific legal advice should be obtained regarding any legal matter. The information contained on this website does not constitute legal advice and no attorney-client relationship is created.
Don likes to target shoot, scuba dive, and pilot airplanes. Most recently, he has been working on his golf handicap. Don enjoys writing, reading, and spending time with his wife, twin sons, and golden retriever, Lucy.