A trust is a property management arrangement in which one person called a “settlor” or “grantor” creates the trust and transfers property to it. A “trustee” holds title to the property and manages it and uses it according to the directions of the settlor. The people who benefit from the trust are called “beneficiaries”.
A revocable living trust is the type of trust most frequently used for estate planning. In a revocable living trust, the same person is the one who creates the trust and transfers property to it, the trustee who manages the property and the initial beneficiary.
This trust can be revoked by the person who created it. The Internal Revenue Service does not treat the creation of such a trust and transfer of property as a taxable event. If the trust has income or loss, then the person who created the trust simply reports that on his own tax return.
Most trusts also state what happens when the trust creator/trustee/beneficiary dies. The trust names a successor trustee and successor beneficiaries. Either:
1. The trust ends and the successor trustee transfers all the assets to the successor beneficiaries; or
2. The trust may continue with the successor trustee managing property and using it for the benefit of successor beneficiaries.
So a very common trust might say, "During my life, use the trust assets for my benefit. When I die, use them for my surviving spouse's benefit. And when she dies, end the trust and give the assets to our children." Or, “continue the trust and manage the property for the benefit of our children.”
A trust will operate only on assets which are transferred to it. For example, land must be deeded to it; cars must be retitled to it; and bank accounts and investment accounts must be transferred to the trust, in order for the trust to govern them. Usually, the estate plan also includes a "pour over" will which says, "Transfer into my trust any property which I did not transfer into it during my lifetime." But any assets which are put into the trust by the will still go through a probate process. Only those which are transferred into the trust during the settlor's lifetime avoid the probate process.
The main reasons to create such a trust are:
1. If it is not safe for a beneficiary to own and have complete control of an asset. A beneficiary might be a minor or simply immature. He might have creditors who would take the property away from him. He might have a drug addiction. He might have a collapsing marriage and risk losing the asset to a spouse. Holding the property in trust can protect against most of these risks.
2. Ease of transfer of the property at death. Because the trust property has already been transferred into the trust during the trust creator’s lifetime, it will pass at death according to the trust’s instructions. It will not be subject to the provisions of a will and the possibility, which continues for a year after death, that a later will with different directions may be discovered. In Virginia the probate process is not expensive and often not difficult. However, if you own real estate outside Virginia, then transferring it to a trust and letting the successor trustee make a deed to new beneficiaries upon the trust creator’s death may be a simpler process then probating a will in Virginia and then having to repeat that process in the foreign state where the real estate is located.
3. A couple with a child by prior marriage. Most couples who have children by prior marriages want:
A. To provide adequately for the survivor between the husband and the wife during the survivor’s lifetime and;
B. Upon the survivor’s death, to benefit equally all of the children of both the husband and the wife by giving them whatever is left.
These two goals are in tension. As the authority of the surviving spouse to use and benefit from the assets increases, the protection for the children of the first spouse to die decreases; and vice versa. One method of accomplishing these goals is to put some of the assets into a trust upon the death of the first spouse to die. The surviving spouse will be benefitted by the assets for the rest of his/her life, but he/she will not be the Trustee who controls them. Upon the surviving spouse’s death, the remaining assets are then passed to all of the children.
For many individuals and families, making a revocable living trust is part of the best estate plan. And the other part is reviewing and being intentional about how you hold assets with survivorship or how you name beneficiaries on life insurance, retirement accounts, etc.
The attorneys at Goodall, Pelt & Carper, PC in Stafford, Virginia are glad to help you. Give us a call at 540-659-3130.