Setting up a living trust

When setting up a living trust, most people name themselves both the Trustor(s) and Trustee(s). By doing so people maintain control of their assets just as before they created a living trust.

While the Trustors are living, assets may be added or removed from the living trust. Assets are only distributed to beneficiaries once all Trustors are no longer living.

The living trust itself, can remain intact up to 500 yrs after the Trustors have passed, but very rarely would this happen. Once the trust's assets have been distributed or depleted, the trust may be terminated.

Trustors create and change language

Once the living trust is created, there is little for the Trustors to do except make amendments to trust language when needed. If both Co-Trustors are living, both Co-Trustees are needed to create an amendment. A surviving spouse can amend the trust alone.

The Trustors are the initial beneficiaries of the trust. When the Trustors have all passed, that is the trigger for distributing the estate to the next beneficiaries in the living trust, typically family or charities. At this point, no one can make further changes to language in the living trust.

Trustees manage assets in the trust

Trustees manage all trust assets in the best interest of the Trustors.

Couples typically name themselves Co-Trustees so either can manage accounts and other assets.

A few duties include:

• Manage bank accounts
• Buy / sell real estate
• Borrow / lend money
• Purchase insurance

If the initial trustee(s) is/are incapacitated, Successor Trustees take over management of the trust, similar to financial powers of attorneys.

Transfering assets to the living trust

This step is crucial. Signing legal documents alone does not transfer all your assets to your living trust. Some legwork is needed on your part.

Real estate   New deeds must be prepared to transfer property to your living trust. We prepare deeds for Arizona properties with your estate plan. Out of state deeds can be prepared by a title insurance company in the county of your property.

Bank accounts   Take all estate planning documents to the bank so they record and copy appropriate information for their records. Your account numbers should not change and your checks can keep your name on them. Bank statements will now reflect the trust's name instead of your name as the owner.

Investments   Non-qualified money (meaning after-tax money that you invest and pay annual capital gains taxes) may be transferred into your trust in the same manner as transferring bank accounts.

Personal property without titles   Living trusts typically have one page assigning all present and future non-titled assets to the trust, including but not limited to jewelry, art, furniture, electronics, firearms, etc. You will not need to list out each item unless you want to specify a beneficiary.

Clients are encouraged to contact us when assistance is needed.

Some assets stay outside the living trust

Retirement accounts   IRA's, 401(k)'s and other tax-deferred assets remain outside the living trust. Transferring them to the trust can cause a taxable event. Your financial advisor would likely stop you before you could accidentally make the change. There are additional tax advantages if beneficiaries are listed on the account rather than listing a trust as the beneficiary.

Life insurance   Ownership of the policy is not changed from the person to the living trust. Instead, the living trust can be named the backup beneficiary of policies. If your trust has age-dependent distribution clauses, young beneficiaries are prevented from spending the insurance policy's payout until a more mature age is reached.

Both retirement accounts and life insurance avoid probate when accounts and policies have living beneficiaries listed.

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Types of Trusts

There are many types of trusts but most are used estates with complex estate tax issues.

Trusts commonly used for families under the $3.5M exemption include:

Testamentary Trust - A trust created after you pass by a Last Will and Testament. This trust may be used to hold assets for beneficiaries. Assets in a Testamentary Trust do not avoid probate.

Revocable Living Trust - A type of revocable trust used in estate planning to control distributions, avoid probate Revocable Living trusts are established during the life of the trustor(s), who retains the right to the income and principal and the right to amend or revoke the trust. When the trustor(s) dies, the trust becomes irrevocable and acts as a substitute for a traditional will.

Bypass/Disclaimer Trust - A revocable living trust that starts as one trust (an A trust) but within 9 months of the first spouse passing can be split into two trusts (an A/B or Survivor/Disclaimer) so each spouse can claim a federal estate tax exemption, allowing $7M to pass in 2009.

A/B Trust - Married couples used ths type of living trust in which two trusts (trust A and trust B) are created. Dividing the estate allows each spouse to avoid federal estate taxes. Otherwise, the surviving spouse takes ownership of all assets and has only his/her exemption when he/she passes.

After one spouse passes, the deceased spouse's trust becomes irrevocable and the principle assets in the deceased spouse's trust are off-limits to the surviving spouse. Only the income generated by the assets may be used. Many married couples find this a disadvantage and opt for a Bypass/Disclaimer Trust when creating a trust so the surviving spouse is not stuck without half the assets if the estate ends up lower than the estate tax.

On the other hand, blended families may wish to use an A-B trust to separate assets to ensure the surviving spouse does not change distribution language of the deceased spouse's trust.

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If an estate is over the estate tax limit, a variety of trusts are used. Below are two commonly used trusts. For more information on trusts to minimize estate taxes, contact an estate planner.

Irrevocable Trust - A trust that cannot be changed, canceled, or "revoked" once it is set up. A "living trust" is not an example of an irrevocable trust. Insurance trusts and "Children's Trusts," or "2503 Trusts," are examples of irrevocable trusts. Irrevocable trusts are treated by the IRS very differently than revocable trusts.

QTIP Trust - A Qualified Terminable Interest Trust (Q-Tip) is a type of trust which provides an unlimited marital deduction for qualified property put into the trust. However, rather than permitting the surviving spouse to have full power to distribute the property to anyone he or she wishes, the trust restricts the ability of the surviving spouse to distribute the property in the trust to a select group of individuals, such as the children, as agreed when both spouses were alive. Without the new QTIP laws, any attempt to "tie down" the property and restrict the surviving spouse's rights to transfer the trust property would have resulted in the property not qualifying for the marital deduction tax benefit.