How does a living trust work?

A living trust in estate planning is a written document that places a person's assets in a trust and enables them to manage the assets during their lifetime. Control of the trust in the specified manner is by the individual who creates the trust, that is, the grantor or trustor. Here is a step-by-step explanation of how a living trust works:

1. Trust Document Preparation: 

• A grantor, with the help of an attorney, shall prepare a legal document known as the trust agreement or declaration of trust. The contents of the document describe who is to manage the funds (the trustee), who the beneficiaries are, and what needs to happen with such assets upon death or incapacity of the grantor.
• Selection of a Trustee: A grantor decides who will manage the grantor's trust. The grantor is often the initial trustee and, therefore, holds onto all management over the assets. A successor trustee is also designated and, therefore, will serve when the grantor is declared incapacitated or dies.
• Naming beneficiaries: The trust document identifies the beneficiaries who will receive the trust assets during the grantor's lifetime, if he or she so wishes, and after death.

2. Funding the Trust:

• Transferring: The grantor transfers the assets under owner ship into the trust. This is termed to be "funding" the trust. In may may include real property, bank accounts, investments, personal property, among others. Documents of title and deeds for the same are hence changed reflecting the ownership by trust.
• Retention of Asset Use: Typically, the grantor, for as long as the grantor is alive and competent, exerts powers concerning the ability of the trust assets to be used and managed. For example, if grantor transfer his/her house into trust, then grantor still own right to live, sell, or refinance it.

3. Control and Flexibility: 

• The grantor exercises total control over the trust's assets if one assumes a trusteeship. He or she retains the power to purchase, sell, and manage assets, or change beneficiaries, or may revoke the trust in case of a revocable living trust.
• Income from Assets: All the income generated from the assets in the trust, such as rents received or returns on investment, normally are credited to the grantor, who is taxed on that income.

4. Disability Management:

• Successor Trustee Takes Over: If incapacitated, meaning if the Grantor can no longer handle their affairs, then management of the trust becomes the responsibility of another trustee as named in the trust document.
• Care and Attention to Finances: The successor trustee adheres to the written guidelines in a trust document that takes care of the assets, attends to the needs of the grantor, and provides for the proper management of assets in a period of incapacity.

5. Dissolution of Assets upon Death of the Grantor:

• Take Out Probate: The fact that the trust actually owns the assets means they do not pass through probate, which can be long and public. Instead, the successor trustee can directly pass assets on to the beneficiaries.
• Following the Trust Terms: The trustee distributes the trust assets in accordance with the terms of the trust document. Distribution can be immediate, spread over time, or subject to conditions (e.g., the beneficiary attains a particular age).
• Continuing Trust: The trust may under some instances continue to upon grantor's death, thus providing a continued financial management and income to beneficiaries such as minor children or disabled family members.

6. Termination or Amendment of the Trust: 

• A revocable trust: The terms of the trust may be amended or revoked during the lifetime and capacity of a settlor. This provides flexibility for changing circumstances.
• Irrevocable Trust: If it is an irrevocable trust, changes or revocation cannot be made without obtaining the consent of the beneficiaries or through court intervention. It offers less flexibility, but there may be a tax benefit or protection of the assets.

7. Tax Implications:

• Income Taxes: Generally, the grantor reports the income from the trust's assets directly on their personal return. There are no immediate income tax benefits with a living trust.
• Estate Taxes: A revocable living trust does not protect the assets from estate taxes upon the grantor's death. Estate planning strategies, like irrevocable trusts or gifting strategies, may be required to minimize estate tax liability.

8. Privacy and Confidentiality:

• Private Document: Unlike a will, which becomes a public record during probate, a living trust remains private. Only the parties involved—the grantor, trustee, beneficiaries—have access to its details.
• No Public Disclosure: This results in the avoidance of going public with the family's financial business, which may avoid conflicts and legal battles.

Summarized:

• Setting Up Living Trust: A living trust is set up by creating a trust document as well as selecting trustees and beneficiaries.
• Funding and Management: The assets are transferred to the trust—which most often bears the name of the grantor—and the trust is usually managed by the grantor throughout their lifetime.
• Incapacity and Death: Successor trustees step in for the grantor in cases of incapacitation or death, distributing assets according to the trust without going through probate.
• Flexibility: The revocable living trust is alterable or can even be revoked within the life of a grantor.

A living trust is a flexible and useful planning tool within the estate, which puts a person in control of his or her property during lifetime and provides for management and distribution of property at death. In order to effectively plan and administer a living trust, such consideration and advice must be obtained from a qualified attorney. At One Pacific Trust, our vision is to be the leading provider of trust services.