An inter vivos trust, also referred to as a “living trust”, is a type of trust used often in estate planning. As indicated by the title, one of the main characteristics of a living trust is that its assets can be distributed to the trust beneficiaries while the creator of the trust, i.e., the “settlor” or “grantor” in legal terminology, is still living. It is to be distinguished from a testamentary trust, which comes into existence only when the grantor passes away.
This is quite different from the way that most estate management tools operate in that they are usually only enforceable upon the death of the estate owner. For example, the contents of a standard will can only be distributed after the creator of the will has passed away.
A living trust works differently. As with all trusts, a living trust is established by a legal document in which the grantor establishes the trust and its terms. The trust is a separate legal entity. The trust document also authorizes a trustee to manage the trust assets and make decisions in the best interest of the grantor and any beneficiaries.
In a simple living trust, the grantor often also serves as the trustee. The grantor might also name a co-trustee and a successor trustee who can step into the role if the trustee becomes unable to serve. The assets eventually are going to pass to the trust’s beneficiaries.
A living trust is not effective, and the legal fees paid for it wasted, if the grantor’s assets are not retitled in the name of the trust. An experienced trusts and estates attorney can provide a grantor with suggestions as to what types of assets to include and how to change the title to the assets, so that ownership passes to the trust.
For example, a living trust may be created when a grantor’s beneficiaries are too young to manage the trust property themselves. The grantor can place specific conditions on the living trust to ensure that the assets in the trust are not released until the beneficiaries reach a certain age and are mature enough to manage their property responsibly.
In general, there are two main types of living trusts, irrevocable and revocable. The contents of an irrevocable trust cannot be amended, modified, or terminated without the permission of the trust’s named beneficiaries. With an irrevocable trust, the grantor is no longer considered the owner of the trust assets, because the grantor has transferred the ownership rights to the trust.
On the other hand, the assets in a revocable living trust still belong to the grantor. Thus, the grantor can amend or modify the terms of trust at any point during their lifetime, as long as the grantor is still mentally and physically able. The grantor can even terminate the trust completely. The majority of living trusts are revocable and remain so until the grantor dies. Once the grantor has passed away, however, a living trust becomes irrevocable.
There are drawbacks to living trusts. They can be more complicated and expensive to set up than other trusts. They cannot be used to designate guardianships for minor children. They do not provide any tax avoidance benefits and do not protect assets from creditors of the grantor or the beneficiaries.
Why Would I Want a Living Trust?
So, why choose to establish a living trust as opposed to another type of estate planning tool? There are several reasons. The main reason to use a living trust is to avoid the time and expense of probate. It also preserves privacy.
For instance, when an estate has to go through probate, it can potentially lose a percentage of its value. This is due to the fact that those who manage the probate process, such as probate courts, attorneys, and estate executors, have to be paid certain fees in accordance with probate law.
With a living trust, however, the trust funds or assets have already been distributed before the death of the grantor. This arrangement helps avoid the need for probate and eliminates the need for the necessary fees and costs associated with probate.
Can a Living Trust Be Modified?
As previously mentioned, the grantor can modify the terms of a living trust while the grantor is still alive. However, after the grantor has passed away, the trust can only be amended if the changes would advance the purpose of the trust, or if circumstances arise that the grantor could not have foreseen. Or, it might be modified if circumstances of which the grantor was unaware when they created the trust.
For example, if the grantor sets up a living trust to provide for their children and then passes away before their last child is born, the grantor’s new child would be allowed to take their portion of the trust as a beneficiary. This is possible because the modification would advance the trust’s purpose in creating the trust for their children.
How Can a Living Trust Be Modified?
There are two main ways to modify a revocable living trust. The first way to modify a revocable living trust is to simply include an addendum and attach it to the original trust document. The grantor would need to rewrite the trust document, sign and have the new documents notarized, and then provide their trusts and estates attorney with a signed and notarized copy. Or, they may wish to have their attorney perform the modification in order to ensure that it is done correctly.
The other method that a grantor can use to modify a revocable living trust is to draft a “restatement” of the trust. A restatement replaces the original trust document with a new version. This method is often used when a trust contains a number of potentially confusing addenda.
It is important to remember that if the grantor revokes the trust, they need to retitle the property, so it again becomes the property of the grantor. Or, if the grantor gets a restatement, again, they need to retitle the trust assets so they become the property of the new trust.
Can a Living Trust Be Terminated or Revoked?
As discussed above, a revocable living trust can still be terminated or revoked while the grantor is alive. If the grantor has already passed away, then either all of the beneficiaries must agree to any change, or they must wait until the purpose of the trust has been achieved.
For instance, if a grantor created a living trust for the purposes of paying for their child’s college tuition and the child has graduated from college, then the trust can be terminated. Again, all of the trust’s conditions must be fulfilled before it can be terminated or revoked.
If the trust serves two or more purposes, e.g. it was meant to provide money for both college tuition and as the means for the child to live comfortably, then the trust cannot be terminated or revoked until the grantor’s child has also passed away. .
Additionally, it is important to note that once a trust is terminated, any of its remaining funds will be distributed in accordance with the grantor’s original intentions.
What If the Cost of Administering a Trust Is Greater than the Value of the Trust Assets?
In general, most courts decide to terminate a trust that is worth less than the amount of money that would be required to distribute the trust property. Some states even have a law providing that a trust must be terminated, if it does not contain a minimum value in funds or property specified in state law.
For example, a statute in California provides that a trust will be terminated if trust assets do not have a value of at least $40,000, or when the market value of trust assets does not exceed the cost of administering the trust. Therefore, it is very important to review the law relating to living trusts in a particular state to make sure that the trust would not be terminated and the trust property could still be managed for the beneficiaries.
Should I Contact an Attorney?
The trust document that sets up a living trust must comply with legal requirements and must be tailored so that the trust operates in the way the grantor intends. The legal requirements to create a living trust are more complex than those for a standard trust. This is especially true when it comes to writing the conditions for a revocable living trust.
Therefore, if you want more information about trusts or are ready to set up a living trust, you should consult a local living trusts attorney. An experienced living trusts attorney can recommend the best type of trust document to use based on your individual circumstances and desires. Your attorney can help you draft, revise, and review the legal document needed to form a valid living trust.
Your attorney can also help you amend or modify the terms of a revocable living trust. If your living trust is irrevocable, your attorney can determine if there are other strategies that may allow you to change it. Additionally, your attorney can provide legal representation in court if you are involved in a dispute or lawsuit that involves a living trust, whether revocable or irrevocable.