Important Facts About Living Trusts

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You've probably seen or heard the term "living trust" used in reference to estate planning, but do you really know what it means? If not, the following questions and answers will help you understand how a living trust works and why you might decide to enter into this type of arrangement.

What is a Living Trust?

A living trust is an arrangement drawn up while you are still alive (hence the term "living" trust) that transfers the management of some or all of your property to another person. A "revocable living trust" can be revoked or changed it at any time, while an "irrevocable living trust" cannot. However, after you die, the terms of either trust typically become irrevocable.

There are three separate parties involved with a living trust:

  1. The "grantor" establishes the trust
  2. The "trustee" is the person or institution who manages the grantor's assets
  3. The "beneficiary" is the person who benefits from the trust

Keep in mind that you, the grantor of the trust, can also be a trustee. For example, when you establish a living trust, you may appoint yourself as the person who manages your assets during your lifetime. You may also share the trustee responsibilities with another person, like your spouse, so you can be sure that you will both maintain full control of your property until your death.

Why do you need a Living Trust?

When you establish a living trust, you are ensuring that the trustee(s) has legal authority over managing your property if you become incapacitated. If you've appointed someone else as your trustee, you can design the trust to only take effect if you become incapacitated. As with a durable power of attorney, a living trust makes it unnecessary for the court to appoint a conservator to manage your property if you're unable to do it yourself in the future.

You don't have to become incapacitated for a living trust to take effect. A living trust can be helpful if you ever wish to turn over the management responsibilities of your estate to someone else, whether you're incapacitated or not.

Does a beneficiary receive payments from a Living Trust?

Some living trust agreements do make periodic payments to beneficiaries, depending on how the agreement is arranged. You can draw up a living trust that appoints a trustee to handle the financial responsibilities of your estate, which may include paying taxes and bills. A living trust needs to be drafted while you still have the mental capacity to make decisions about your estate, and the terms of it must be clearly stated in the signed legal document.

Can a person with declining mental capacity set up a Living Trust?

You must prepare a living trust while you still have the mental capacity to do so. For instance, if you suffer from dementia, your lawyer may require a doctor's evaluation in order to prove that you still have the mental capacity to draft and sign a living trust. If the doctor determines you no longer have the mental capacity to enter into this type of contract, you cannot arrange and sign a living trust. Entering into a contract while you are mentally incapacitated can cause all sorts of problems down the road if someone challenges the validity of your living trust.

A living trust is a complex estate planning tool that should be discussed with a lawyer before any decisions are made. In some cases, a living trust may not provide the greatest tax benefits for the grantor, but a lawyer like one from Acton & Snyder, LLP can help you determine which estate planning tools make the most sense for your situation.