What Is a Trust?
A trust is a legal mechanism where a person, known as the settlor, transfers property to a trustee to hold, manage, and distribute for the benefit of one or more beneficiaries. Trusts that are effective during the settlor’s lifetime are called *living trusts* or inter vivos trusts. If the settlor has the ability to modify or cancel the trust, it is known as a *revocable living trust*.
Do I Need a Living Trust?
Not everyone needs a living trust. However, if you have a significant estate, minor children, or are in a second marriage, you should consider establishing one. Some key benefits of a living trust include:
- Incapacity management: If you become incapacitated, your successor trustee can manage your trust assets for your benefit without the need for court conservatorship.
- Probate avoidance: Trust assets avoid probate, saving costs, reducing delays, and avoiding the publicity that comes with probate.
- Estate tax benefits: Your trust can be structured to reduce or eliminate federal estate taxes.
- Asset management for minor children: After your death, the trust can continue managing assets for the benefit of your children or other beneficiaries.
Is a Living Trust a Separate Legal Entity?
Yes, a trust is a separate legal entity from its creator (the settlor), its trustee, and its beneficiaries. Even if you are acting as settlor, trustee, and beneficiary, these roles are legally distinct, and the trust remains a separate entity. During your lifetime, you manage the trust assets for your benefit just as you did before creating the trust. Upon your death, your successor trustee will distribute or retain trust assets according to the instructions in your trust declaration. Unlike a will, a living trust is effective as soon as you sign the trust document and transfer assets into the trust.
What Happens to My Living Trust When I Die?
Upon your death, the trust remains in effect, and the successor trustee steps in to manage or distribute your assets according to the instructions you’ve provided in the trust document. Because the trust avoids probate, your successor trustee can transfer trust property quickly and efficiently to your beneficiaries, as outlined in the trust declaration.
What Do I Put Into My Living Trust?
You can transfer most types of assets into your living trust, including:
- Bank accounts
- Brokerage accounts
- Your residence and other real property
- Personal property
However, some assets, like IRAs and 401(k) accounts, cannot be held in a trust. Transferring your assets into the trust is referred to as funding the trust.
Do I Need to File a Separate Tax Return for My Living Trust Assets?
No, as long as your living trust is revocable and you serve as the trustee. In this case, the trust doesn’t need a separate tax identification number, and you continue to report income and deductions on your own tax return, just as you did before establishing the trust.
If I Have a Living Trust, Do I Still Need a Will?
Yes. A living trust only governs the assets that are held in the name of the trust. Assets that are not transferred to the trust (and do not pass by other means, such as beneficiary designation or joint tenancy) will be distributed according to your will. Most people who establish a living trust also create a pour-over will, which ensures that any assets not in the trust at the time of death are transferred to the trust for distribution.
By creating a living trust, you can effectively manage and distribute your assets, minimize legal complexities, and ensure that your estate is handled according to your wishes. However, it is essential to assess whether a living trust aligns with your unique circumstances and estate planning needs.
