Migration & Relocation Specialist Service
A living trust is a type of trust created during a person's lifetime. Living trust agreements with detailed terms and conditions of an estate are usually developed by a lawyer. The trustee manages the assets of the trustor during the trustor's lifetime and transfers to the beneficiaries after trustor’s death. A living trust is a written legal document that can partly replace a will.
Generally, a living trust is divided into two categories: Revocable Living Trust and Irrevocable Living Trust. Most living trusts are the former ones, that is, when a person is alive, he/she can modify or cancel the trusts any time.
The Purpose of Living Trust
Many people mistakenly think that a living trust is made to save real estate tax because estate planning schemes can be designed to include the terms and condition of a living trust to avoid real estate tax. However, the primary purpose of a living trust is to avoid the legal formalities of estate probate.
What is estate probate? When a person dies, his or her estate will be assigned according to his or her will and legal proceedings. The whole legal proceedings are the estate probate. The duration that an estate probate takes depends on the complexity of the estate, the number of beneficiaries, and the conditions of the will. In general, the more complex the estate is, the longer the estate probate will be. The longer the probate takes, the more costs will be. The estate that the trustor transfers to a living trust before the trustor’s death does not have to be probated. The successive trustee can directly transfer the ownership of estate to the beneficiary designated by the trustor.
In addition, one of the purposes for clients to set up a living trust is the management and preservation of estate. Due to the limited time and energy, the trustor cannot personally manage the estate and the correlate transaction. Therefore, trustors can set up living trusts to ease the burden. After the living trust of the estate is set up, the estate is held and managed by the trustee during the living trust period, and the beneficiary enjoys the benefit of the estate. The trustor no longer has the right to dispose of the trust estate. The debts incurred by the trustor during the trust period will not affect the trust estate. Thus, this part of the estate was preserved. At the same time, the beneficiary's right to the trust estate is determined by the trustor, and the beneficiary can only enjoy the rights that have been set, to achieve the purpose of preserving the trust estate.
Finally, the trustor trusts the estate to a trustee with rich wealth management experience to manage for the purpose of increasing income and the value of the estate. Through personal living trust business, the trustee using his/her own abilities, experiences as well as other advantages to manage and run the trust estate for the trustor, which not only relieves the burden on the trustor but also solves the trustor's difficulties and increases the return on the estate.
Similarities and Differences between Wills and Living Trusts
As mentioned above, a living trust is a written legal document that can partly replace the will. What are the similarities and differences between a will and a living trust?
Will Probate is required (the including estates which are located outside of the resident state);
All the beneficiaries are required to be present;
The court handles the challenges of the beneficiary and the disputes of the creditor;
When the testator dies, it becomes a public record.
Will Probate is not required;
The costs of will probate regarding the estates located outside of the resident state are avoided;
No automatic supervision of the dispute by the court;
Similar regulation of tax saving as the trust
In addition to a will, there must be a power of attorney or legal administrator to manage the estate.
When the trustor is willing and has the ability to manage the trust estate, he/she can be a trustee. It is also possible to appoint a successive trustee to take the place of the trustor after he/she has passed.
It is cheaper to make a will than that of a trust. However, the costs of a will probate generally exceed the costs of making a will or a trust.
Preparing, raising and managing trusts costs more than that of a will. However, the cost of a will probate can be avoided if the estate is transferred to the trust.
In the absence of wills, the estate that has not been transferred to a living trust and other proceedings that can avoid the estate probate will be distributed to close relatives of the deceased according to the law of a state with jurisdiction. It is obvious that a living trust cannot completely replace a will, because it is likely that the trust does not contain all the estates of the trustor, especially those acquired after the trust is established but before the trustor passes away. At this point, it is better to set up a pour-over will that automatically transfers all assets to the trust that have not been transferred during the trustor's lifetime.
Trust is, therefore, an estate/property planning tool that can replace or supplement wills and can help to manage and distribute estate/property well.
The Establishment of a Trust
To establish a trust, first it is to make and sign a document, i.e., a declaration of trust or trust agreement, and then to transfer the estate to the trust. The estate is managed and allocated by the trustee designated by the trustor in the trust's statement for the beneficiary’s interest.
After signing the trust agreement, the trustor transfers the estate under his/her name to the trust, so that the trustee has the legal title of the trust estate. However, the trustee will not be the real owner of the estate. They only can use the property according to the terms of the trust agreement and subject to the conditions permitted by law.
It is important to note that property outside the resident state should be included in the trust to avoid the estate probate of the home state. Life insurance benefits will be paid directly to the beneficiaries, without the court probate. However, if the beneficiaries are minors, it is considered to change the policy beneficiaries as trusts.
The Basic Content of Living Trust Agreement
As mentioned above, the living trust agreement clearly and comprehensively provides the rights, obligations, and relationships of the trust parties. The basic contents of the trust are as follows:
The trust contract must first define the trustor, the trustee, and the beneficiary.
The trustor is important to a trust relationship, and he/she must have the absolute ownership of the property. Otherwise, the estates cannot be used for establishing a trust.
The trustee has the legal title of the trust estate and has the power to manage and dispose of the trust estate during the term of trust.
The beneficiary is the beneficiary of the trust income in the trust relationship.
The purpose of trust should be clear in the trust indenture. The purpose of trust should not violate the law, national customs and public morality, and beneficiaries should clearly accept the purpose. The trustee can execute the trust indenture according to this purpose.
In the trust indenture, the trust estate should be specified in detail. Firstly, the nature, kind, quantity, and quality of the trust property should be specified. The explanation should be explicit. Secondly, the methods and time of transferring the trust estate should be specified so that the trustee can exercise corresponding duties.
The trustee has legal title of the trust estate during the term of trust, but his/her entitlement to the trust property is limited. The rights he/she obtains from the trust estate are given by the trustor. The corresponding authorities of the trustees vary according to the different purposes of trusts.
Scope of Beneficiary's Rights
Beneficiaries enjoy the trust income, but also have the corresponding rights, such as the supervision right of the trustee, etc. These rights are determined by the status of beneficiaries in the trust relationship. The scope of beneficiaries’ rights required in the trust mainly refer to the benefits that beneficiaries can enjoy.
Term of Trust
Term of trust shall be specified in the Trust Indenture. The term of trust can be an accurate time period, such as a few years. It also can be based on the fulfillment of the trust’s purpose, i.e., the trust terminates at the time that the purpose of the trust is fulfilled.
In the trust with business purpose, the trust indenture should specify the trustee's remuneration. For example, the standard, method and amount of remuneration, payment time and payment method should be clearly specified.
The Reservations Clauses of the Trustee
In general, the trust indenture cannot be withdrawn without cause upon signing, and the trustor is not free to terminate the eligibility of the beneficiary. However, in some cases, the trustor may provide reservations clauses in the trust indenture, that is, reserving the right of withdrawal of the trust indenture and the right to change the beneficiary. The trustor and the beneficiary may, in accordance with the reservations clause in the contract, deal with unforeseen accidents occurring during the term of trust.
Living trust documents usually include the following three very useful additions:
1. A Pour-over Will is for the assets that have not been placed in the living trust are disposed in the future according to the terms of the living trust.
2. A Durable Power of Attorney is for the situation the trustor is unable to manage the property or make a financial decision and an agent will be authorized to do it.
3. An Advance Health Care Directive is for the situation that the trustor is unable to make the decision regarding medical treatment and an agent will make the decision on behalf of the trustor.
Who Needs to Set Up a Living Trust?
In general, young couples with limited assets or no children do not need to set up a living trust. Every state has different the highest amount of assets for estate probate. If the amount of heritage does not exceed a certain level, the court will go through it in a quick and simple way, instead of traditional court probate. The amount of assets varies from 10,000 USD to 275,000 USD. Most of the state provides the amount from 30,000 USD to 100,000 USD. The calculation of assets generally only includes the assets fully owned by the deceased.
In general, the greater the amount of assets (especially real estates), the more benefits can be obtained from the living trust. In fact, most people who plan about their property will eventually choose a living trust to transfer their estates, especially for those high-value assets, such as real estates, stocks, claims, and other valuables.
How to Ensure the Control of the Living Trust Estate?
Most of the living trust is a revocable trust. Thus, the trustor reserves the right to change the trustee, withdraw the trust estate, change the beneficiary, and revoke the trust at any time. In general, the trustor will designate himself or his spouse as a trustee, and a third party as a successor trustee. In this way, although the property is managed by the trust, the trustor has full control over the property.
What are the Shortcomings of the Living Trust?
Because living trust is not under the supervision of the court, the trustee may take advantage of the trustor if the trustor does not make a good decision on the appointment of a trustee. In terms of costs, the cost of drafting a trust is higher than the drafting of a will. However, for the complex cases, the costs of wills and trusts are not much different. In addition, the trust's paperwork is more complicated than that of a will. For example, the ownership of the property shall be changed into the name of the trust after the trust is established.
Is Living Trust the Only Way to Avoid Probate?
Living trust is not the only way to avoid will probate? For example, you can designate the beneficiaries of insurance, retirement and other accounts. These estates will be automatically left to designated beneficiaries after your death. The bank account can design the heir's settings via "Pay on Death". Fixed assets can be automatically left to their spouses through the "Joint Tenancy with Right of Survivorship". However, living trust is the most comprehensive, efficient and flexible tool to avoid probate.