Living trusts have become popular tools for families of various economic levels because of their ability to control distributions, avoid probate, maintain privacy and help some larger estates avoid estate taxes.
A living trust can be pictured as a box which holds a person's assets.
When a person creates a living trust, he or she is the trustor, and is the only one who can amend or revoke the trust, unless a spouse or common-law partner is listed as a co-trustor.
The trust is managed in the best interests of the trustor(s) while he or she is living. When the last trustor has passed, the living trust's distribution instructions take effect.
Most of the trustor's assets are placed into the living trust by the trustor before he or she passes. The assets owned by the trust are managed by a trustee. Most trustors list themselves as the initial trustees. A married couple or common-law couple often appoint themselves as co-trustees.
If the initial trustee(s) is incapacitated or has resigned due to illness or travel, a successor trustee takes over and manages the assets in the best interest of the trustor until the initial trustee is ready to return to duty. The successor trustee, while the trustor/initial trustee is living, acts in a similar manner to a financial power of attorney.
When the trustor(s)/initial trustee(s) passes, the successor trustee steps in to handle the transition of the estate, similar to an executor or personal representative.
The successor trustee follows many of the same steps of probate without the supervision of a court. The beneficiaries may request at any time to see an accounting of all activities of the successor trustee.
The job of successor trustee can last many years after the passing of the trustor(s) if the living trust has instructions to hold assets for young beneficiaries or as part of a life estate.
Even though most young families do not have large estate, most young parents have life insurance to help provide if an income provider passes. At age 18, a beneficiary of a life insurance policy has access to the money unless the money is distributed elsewhere, such as to a trust.
Many families use a living trust to hold life insurance payouts until children reach an older age, say 25 or 30, before receiving an inheritance with no strings attached. Prior to that point, if a beneficiary needs money for reasonable health, education, maintenance or support needs, the beneficiary or the beneficiary's guardian may make a request to the successor trustee, who may approve or disapprove the request.
Creating a life estate
A trust can hold an asset for someone to use before being distributed to beneficiaries. A common example is a home which may be used by children, their guardians or a spouse of a blended family. The trust can may make partial or full payments towards mortgages, taxes, utilities, maintenance and upkeep until a certain point at which the home is finally sold and distributed.
Assets in a living trust avoid probate but those assets must be transferred to the trust before the last trustor passes. The process of transferring assets to a trust is called funding a trust. Learn more about probate.