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In the United States, a family living trust refers to a trust that may be revocable by the trust creator or settlor (known by the IRS as the Grantor). Living trusts are often used because they may allow assets to be passed to heirs without going through the process of probate. Avoiding probate will normally save substantial costs (the probate courts, in some states, charge a fee based on a percentage net worth of the deceased), time, and maintain privacy (the probate records are available to the public, while distribution through a trust is private). Both living trusts and wills can also be utilized to plan for unforeseen circumstances such as incapacity or disability, by giving discretionary powers to the trustee or executor of the will.
The family living trust grantor/settlor may also serve as a trustee or co-trustee. In the case where two or more co-trustees serve, the trust instrument may provide that either trustee may act alone on behalf of the trust or require both co-trustees to act/sign. The trust instrument may also provide that the other co-trustee shall act as sole trustee if the grantor becomes incompetent and is unable to continue administering the trust.
Important safeguards contained in the probate laws of most U.S. jurisdictions do not apply to trust administration. If the decedent leaves a will, his/her probate proceedings must be conducted under the auspices of the probate court. Unlike trusts, wills must be signed by two to three witnesses, the number depending on state law. Several safety provisions of probate law in the U.S. protect the decedent's assets from mismanagement, loss, and embezzlement, such as the requirement that the executor of the will be bonded, the real property insured, the executorís sale of real estate monitored, and itemized accountings filed with the court during and at the end of probate administration. These procedures do not occur when a decedent's estate passes by trust. Trusts are conducted in private, unless a conflict develops and one of the parties seeks resolution by a court order.
Family living trusts generally do not shelter assets from the U.S. Federal estate tax. A married couple having a trust can, however, effectively double the estate tax exemption amount (the amount of net worth above which an estate tax is levied) by setting up the trust with a formula clause. A formula clause takes advantage of the unlimited spousal deduction allowed under the internal revenue code. When the first married individual dies, the trust pays out to the beneficiaries an amount up to the total unified credit. The amount is set by the formula clause, not strict dollar amounts, because the unified credit increases over time. Without a formula clause, the unified credit could be wasted. The remaining amount of the estate (after the unified credit is exhausted) is paid to the spouse. Thus, when the first spouse dies, no estate tax is owed (just as if the individual died intestate). However, when the second spouse dies, the distribution to the trust beneficiaries is subject to that decedent's unified credit. The rest is subject to estate tax. If the married couple had died intestate, the first decedent's unified credit is lost because everything is transferred to the spouse upon his/her death. A formula clause is necessary only if the value of the estate is larger than the amount of the unified credit.
For a Family living trust, the grantor/settlor will often retain some level of relevance to the trust, usually by appointing him- or herself as the trustee and/or as the protector under the trust instrument (in jurisdictions where protectors are recognised). Living trusts also, in practical terms, tend to be driven to large extent by tax considerations. If a living trust fails, the property will usually be held for the grantor/settlor on resulting trusts, which in some notable cases, has had catastrophic tax consequences. A living trust is not under the control and supervision of the probate court, and property held by such a trust is not part of a descendent's probated estate.
The Parties To The Trust
* Grantor/Settlor: The person who sets up the trust; also called the settlor, trustor, or trustmaker.
* Trustee: This is the person who will manage the trust assets. This also may be the settlor in a Revocable Living Trust, since the settlor wants to manage his or her own property. Some revocable living trusts are "self settled trusts" (that is, the grantor is also a beneficiary of the trust).
* Successor trustee: Where the Grantor is a Trustee, the Successor Trustee is the person who will manage the trust assets when the Grantor dies, or in the event the Grantor becomes incapacitated. Upon the Grantorís death, the Successor Trustee will immediately have the same powers that the Grantor had as Trustee to buy, sell, borrow, or transfer the assets inside the trust.
The Successor Trustee has the right to distribute the trustís assets according to the Grantorís instructions in the trust instrument. The Successor Trustee does not have the legal right to change the trust. The trust becomes irrevocable upon the Grantorís death. The Successor Trustee has the right to manage the assets in the estate, but must do so for the benefit of the remainder beneficiaries.
At the Grantorís death, the Successor Trustee automatically takes over without court order, pays any debts, expenses and taxes directed to be paid by the terms of the written trust document, and then distributes the property to the trust beneficiaries. Where the trust is scheduled to terminate on the Grantorís death, and the trust is merely a means of avoiding probate, the death beneficiary should ordinarily be named Successor Trustee.
* Beneficiaries: The people who will receive the benefit of the trustís assets are called beneficiaries. Sometimes, the grantor is the original beneficiary. Those who take after the grantor's death are "remainder beneficiaries".
Establishing a Family Living Trust
To establish a living trust, an individual transfers title of assets from himself as grantor, to a trustee of the trust (often the trustee and grantor are the same person), to administer for the benefit of himself and at least one other person. The trust may also name the remainder beneficiaries who will take over after the grantor dies. The beneficiaries get nothing until that person dies.
Depending on the size of the trust, it may be advisable to use a corporate trustee such as a bank. A substantial advantage of this approach is that a corporate trustee can act in perpetuity, whereas an individual cannot. Corporate trustees must provide accurate and detailed records of all transactions that take place in the trust, for however long the trust exists. Those records become what is known as an "accounting" of the trust, which may be required to be provided to a court or remainder beneficiaries. Corporate trustees also are required to manage the investments held in the trust. Laws have been updated in most states to allow a corporate trustee to act in a "directed capacity," meaning that the trustee is required to have oversight of the trust investments, but not the day-to-day management of them.
To establish a basic living trust, the Grantor signs a document called a declaration of trust, which is similar to a Last Will and Testament. In the document, the Grantor typically names himself or herself as trustee, and transfers assets to that trust (i.e., the transfer is actually made from the Grantor to himself, as Trustee). Because the Grantor is named as the trustee, he or she maintains full control over the assets.
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