What is... a Living Trust?
This is part of an on-going series of blog posts titled the "What Is..." series, where we attempt to explain, in simple terms, common estate planning terms and concepts. To read other posts in this series, click here.
At its core, a trust is a legal arrangement that deals with the ownership and management of property, both real estate (like your home) and personal property (e.g., jewelry, cash, bank accounts, your socks). The trust defines how property named in the trust is owned, who can control and manage it, and what type of control can be exercised over it. A trust also directs what happens to the property in it after the person or people who made the trust dies.
While there are different types of trusts, this post focuses on a “living trust,” also known as a “revocable trust,” because it is the most common type of trust used in estate planning. It’s a type of trust that you can amend, or make changes to, during your life.
One way to think about a living trust is that it is a box that you put your property in. After you put property into the box, the box now has the value of everything you put in it. The box is controlled by a legal document with special instructions detailing who can reach into the box to add or remove property, how the property in the box must be handled, who benefits from the contents, and who ultimately gets the contents of the box. This legal document is the trust document signed by the person or people creating the trust. The trust document is just a fancy contract defining the rules surrounding property placed in the box.
Control and management of the property in the box is also very important. Initially, control is usually reserved for the people who put their property into the box. The people who put the property into the box are called “trustors.” The trust document specifies who can manage (sell, gift, invest, purchase) the contents in the box. The managers are called “trustees.” Because people who put property into the box usually want to control the contents while they are living, the trustors are usually also the initial trustees. You can have more than one job at the same time.
But what if something happens to the trustees--maybe they don’t have the ability to take care of the property in the box or they die? Who is going to take care of the property? In this situation the trust document will appoint what is called a “successor trustee” who is given access to the trust box contents when the initial trustees are unable. The trust document will also direct how the successor trustee must handle property in the box, and who should receive the property in it when the trustors die.
A typical living trust benefits the trustors (remember, those are the people who created the trust and supplied property into the box) while they are alive. So along with being the trustors and the initial trustees, they will also benefit from the contents of the box. They are the “beneficiaries” of the trust. Once the trustors have died, the trustors have described in the trust document who will become the beneficiaries of the contents of the box.
Ultimately, if created properly, a living trust ensures the property in the box will benefit the trustors during their lifetimes, that the property will be safely in the hands of trustees that will care for the property, and that the property will be distributed to beneficiaries according to the trustors wishes when they die. It’s a seamless transition that avoids the time, expense, and public process that is probate court (which is a court process that takes place if you die with only a will or with nothing in place). If the trustors have young children when the trustors die, a living trust can contain a comprehensive set of instructions for how to care for those young children with the property in the box.
Of course a living trust has more nuances and complexities than is described here. The success of any estate plan depends on it being carefully crafted to address individual desires and situations. We provide a free initial consultation where we can help you decide whether a living trust, or other type of estate plan, will best serve you.