Your Living Trust is called by many different names. Besides a Living Trust, it is sometimes also called a Grantor Trust, a Revocable Grantor Trust, a Revocable Trust, or sometimes just a Trust. The purpose of this document is to explain just what a Living Trust is, whatever name it's called, how it functions, and what you must do to make it work as intended.
SOME BACKGROUND INFORMATION
In all fifty states of the United States, people have the right to determine where their property is to go after death. The instrument most commonly used to accomplish this task is that document known as the Last Will and Testament, often referred to simply as a Will.
A Will is a document in which one expresses his or her desire as to the disposition of his property at death. Upon death, the Will would be the written instruction that the law would follow in deciding how the deceased's property is to be distributed.
One of the shortcomings of a Will is that it only indicates instructions for property disposition -- it does not actually transfer the deceased's property. To accomplish the actual transfer of property as directed by the Will, the law in every state provides for what is called probate. Probate is an administrative procedure prescribed by state law which dictates the
steps that must be taken in order to carry out the instructions expressed in a Will. The objections that many people have concerning probate are the high cost, the complexity, and the time involved. As a result, many have looked for alternatives to probate.
Property can be passed to desired heirs at death without probate. Several methods are available for doing so. One of the most common is to hold property in joint tenancy with right of survivorship. For example, if a husband and wife hold title to a car as John and Mary Smith, or the survivor, there would be no requirement of probate as to the car in the case of the death of John or Mary. Rather, upon the death of one of them, title automatically vests solely and entirely in the one who survives. Real property (land and buildings), motor vehicles, bank accounts and stocks are other examples of property that may be held in a joint tenancy with right of survivorship.
Joint tenancy cannot always provide an adequate alternative to probate, however. If John or Mary died, probate is avoided as to all property held in joint tenancy. If both died, however, either together or one after the other, it is very likely that a probate will be required because there would no longer be a living joint tenant. An additional problem is that joint tenancy may not, for one reason or another, be a good or desirable way to hold property even when there are two living spouses. And it is a very awkward tool to use for passing property if a disposition other than all to the survivor is desired. These problems, as well as others, can be solved by the use of a Living Trust.
USING A LIVING TRUST
What is a Living Trust?
In its simplest terms, a Trust is a legal person. It is not a flesh and blood person like people are, but rather an entity who, like real people, is recognized by law as capable of doing legal things like making contracts, holding title to property, etc. It is probably easiest to understand it by comparing it with a corporation (also a legal person without flesh and blood), even though a trust might be much less complicated than a corporation. A Living Trust is typically revocable, meaning that it is a trust which can be destroyed (revoked) at any time by whoever made it. A Living Trust is typically a grantor trust, meaning it is a revocable trust which has been created primarily for the benefit of the grantors (ie. the person(s) who made the trust).
Who are the Parties in a Living Trust?
There are three parties involved in any trust. The first is the Grantor (who is sometimes also called a Trustor or Settlor). The Grantor is the person who creates the trust and puts property in it.
The second party is the Trustee. The Trustee is similar to the president of a corporation. He or she acts for the trust, signing documents and making decisions when required.
The third party is the Beneficiary. The Beneficiary simply receives the benefit of the trust, whatever that may happen to be. Even though there are three parties in the trust, they may actually be the same person or persons. In other words, a husband and wife could be the
Grantors, Trustees, and Beneficiaries all at the same time -- and often are in Living Trusts
that are used as an alternative to probate.
What are the Rules for a Living Trust?
The rules for any trust, that is, what the trust may, may not, and must do, are contained in the written document that creates it. In that sense, you determine the entire game
plan of your Living Trust when the written document is drafted and signed. Typically, a Living Trust will require all property to be controlled by the Trustee (who likely is also the Grantor), and used for the benefit of the first named Beneficiary (who is likely also the Grantor) as the Grantor requests. In other words, the control that one has over his or her assets is in no way decreased or otherwise affected by the existence of the trust. The Living Trust also typically provides a plan of property disposition in the case of the death of the Grantor(s). At that point, the trust document would read very much like you would expect the Grantor's Will to read, because it is performing at that point the function that the Will would otherwise perform.
How is the Living Trust Different from a Will?
The difference between the Living Trust and a Will is that the trust provides in itself the ability to transfer the property of the Grantor without need of probate (as does a joint tenancy with right of survivorship). A Will does not.
In the Trust, a Successor Trustee is named to succeed to the position of Trustee after the death of the original trustee, much like a Personal Representative (often known as the executor) is named in a Will to succeed to the position of controller of the deceased's estate. Unlike the Personal Representative, however, the successor trustee's power to transfer the property is automatically complete at the death of the original Trustee. The Personal Representative designated in a Will, on the other hand, has no such power unless and until the probate process is initiated. That means that in the case of a Will, a lawyer will typically
have to be hired and the probate will have to be concluded. The Successor Trustee has without any court intervention the power to simply pay the debts of the decedent and transfer the property in the estate (actually there is no estate but rather trust property) as the trust document instructs. No court supervision (ie. no formal probate) is required. The Successor Trustee may have to provide proof of death of the original Trustee, just like the survivor of a joint tenancy must show proof of the death of the other tenant. And the successor trustee may have to show proof that he or she is the successor trustee (by showing the trust document). But both of these requirements are small compared to the requirement of commencing and
concluding a probate. And typically, the services of an attorney will be little required, if at
all, by the successor trustee.
What Information is Needed to Create a Living Trust?
Basically the same information that is needed to draft a Will. Since the actual function of the Trust is the same as the Will, the same information is required.
How is Property Transferred to the Trust?
THE KEY TO THE SUCCESSFUL USE OF A LIVING TRUST, (and the one job that does not have to be completed in the case of a Will) IS THE TRANSFER OF ALL THE GRANTOR'S PROPERTY (with a few possible exceptions) TO THE TRUST. Generally, transfer of property to the trust is made in the same way as you would transfer property to anyone else. Following are general instructions for transferring different kinds of property.
If you wanted to transier real estate (land or buildings) that you owned to another person, for whatever reason, you would have to sign a formal deed which conveyed or transferred that property. The same thing would be done in order to conveyor transfer real property to a Living Trust that you have created.
For example, lets assume that on May 1, 1989, John and Mary Smith have created and signed a Living Trust for the purpose of avoiding formal probate and that they had a house which they wanted placed in or transferred to the trust. In the deed used to transfer the property to the trust, John and Mary would be designated as grantors (the persons who are transferring the property) in whatever form they originally had title transferred to them; it might be something like John Smith and Mary Smith, as tenants by the entirety. The trust would be designated as the grantee (the person to whom the property was being transferred) by indicating the name of the trustees, the name of the trust (if one was given in the trust document), and the date of the trust. Thus in John and Mary's case, the grantee might be designated as follows:
John Smith and Mary Smith, as Trustees of the "Smith Trust" dated May 1, 1989
Variations of the above expression are permitted, so long as the names of the trustees are
indicated, their capacity of trustee is indicated (otherwise they will be assumed to hold title
personally) and the trust is identified (it is identified above by reference to its name and date).
Generally, it is advisable to have the deed prepared by an attorney since more technical requirements are involved in the transfer of real property than in other property. Another reason to have an attorney involved with the real estate transfer is that you may not hold deed to the property. You may have a land sale contract purchaser's or seller's interest, or a mortgagee's or mortgagor's interest. Different documents are required to transfer different kinds of real estate interests. An attorney would know the proper document and if any other considerations were involved.
Motor Vehicles and Similarly Titled Properly:
As in the case of real property, ownership of a motor vehicle is also proven by a piece of paper, this time referred to as a title instead of a deed. Again, to transfer a motor vehicle
title (or mobile home title if the department of motor vehicles requires a title for it), you must do the same thing that you would do if you were to sell the vehicle to someone. Every motor vehicle title has a blank line that a transferor must sign to indicate that he or she is releasing his or her interest. Another space is provided to indicate who the transferee is (and possibly a line for the transferee to sign as well). To transfer title in your motor vehicle, you must signoff as transferor and sign on as trustee of the trust as transferee, indicating on the title that the transferee is the trust, using the same designation that was used and described for real estate.
Bank Accounts, Depostits etc:
Bank accounts (including savings accounts, checking accounts, CDs, and other funds kept at the bank) are usually transferred to the trust by visiting the bank and telling them that you wish to transfer whatever accounts (etc.) you have to the Living Trust using again the name as explained in the real property instructions. Each bank has its own forms that they require.
Usually, the bank officials will want to see a copy of the trust. They are not trying to be nosy. They merely want to be certain that there really is a trust document in effect so that
upon your death they don't end up not knowing what to do with the funds. They may even want to keep a photocopy of one or more pages of the trust document. That way, they would know ahead of time who will be coming in for the proceeds of the accounts (ie. the Successor Trustee) after the death of the Grantor(s).
Your bank should also be informed that YOUR TRUST DOES NOT NEED TO HAVE A SEPARATE TAX IDENTIFICATION NUMBER for reporting interest on accounts. Your SOCIAL SECURITY NUMBER should continue to be listed as the number to report as the recipient of interest on any accounts. The tax law does not regard the Living Trust as a separate taxpayer (although some other kinds of trusts are separate taxpayers) while the Grantor(s) are alive. CONSEQUENTLY, THE GRANTORS SHOULD CONTINUE TO FILE AND PAY INCOME TAX AS THEY ALWAYS DID, as if the income was theirs, because it is according to the tax law.
It is also unnecessary, in the case of checking accounts, to have checks printed in a different fashion. You should be able to use the same check blanks as you have always used.
It is sometimes very helpful to bring with you this document and let the people at the bank read it so they know for certain what you want to have done.
Stocks, Bonds, etc:
Stocks, bonds and other such investments also need to be transferred to the trust. Generally, these documents have blanks for the transferor to sign and to designate the new transferee in much the same way as does a motor vehicle title. If you have all of your stock and bond holdings handled by a brokerage company, you may only need to transfer your interest in your account with the company. You should talk to your brokerage company in that case and bring this document along with you.
If you are dealing directly with the stock company, you will have to send your certificate of stock ownership to them, with a document called a stock power, and they will send back to you a new certificate indicating the new owner. Again, the new owner should be the trust designated as explained in the instructions for transferring real estate. You may find, however, that the stock company may type on the new stock certificate a different phrase than you indicated when you sent the old certificate to them. The following variations, or others that are similar, may be used:
John Smith and Mary Smith under terms of trust dated 5/1/89
John and Mary Smith trustees U/A/D dated 5/1/89
John Smith and Mary Smith, UTD 5/1/89
Don't be concerned with the precise phrase used by the company unless it appears that they have typed the wrong name, date, or something else that just doesn't seem right. If you do think there has been an error, however, you should contact your attorney.
Insurance and Other Properties With Beneficiary Interests:
Upon the death of the Grantor, insurance, pension or other benefits may be payable because of the death. If the named beneficiary in the policy is an adult person or a legal organization (church, school, etc), the proceeds would be paid directly to that party without need of formal probate. However, it is important to realize that person would receive the proceeds without any conditions -- and the proceeds would not be divided according to the directives in the trust. If it is desired that the insurance benefits be divided as is the rest of the property as directed in the trust, the trust must be named as the beneficiary. In the case of John and Mary Smith, Mary would be the appropriate primary beneficiary designation since John wants everything to go to Mary if she survives him. However, an appropriate secondary beneficiary would be:
The acting Trustee of the "Smith Trust" dated May 1, 1989.
Note that the above indication does not name the Trustees for it is presumed that the Trustees (if they were also the Grantors as in the Smith's case) would be deceased at the time
that the secondary beneficiary designate would come to be used.
An important item to remember is that minor children should never be named as beneficiaries in an insurance policy. If they are named, the insurance company may be required to ask the court to appoint a conservator to keep the money for the children until they reach the age of majority. The result is expensive, inflexible and rarely in keeping with the wishes of the deceased insured person. And it means that you do not use the terms of your trust, regardless of how wise those terms are, to administer the property for the minor children.
To change the beneficiary designations on your life insurance, you should contact
your insurance agent. Again, it would be helpful if you would allow him to read this section
so that he or she knows what you want.
Property Without Title Documents:
Much of your property has no official piece of paper which designates who has title to the property. Examples of such property are your couch, oven, tools and your dog. All the untitled property that you owned as of the date you signed the trust was placed in the trust by your statement saying so and no further paper evidence should ever be required to prove that
the property is in the trust. However, you may acquire untitled property in the months and years after you signed the trust. For that property there is no piece of paper which proves that it is in the trust, even if you intended that it be so when you acquired the property.
For the most part, this failure to have paper evidence that proves your untitled property is in the trust will not cause any problem. When your Successor Trustee sells the property (or gives it to the parties as may be stated in the trust document) he or she will likely not encounter problems transferring formal title since there is no formal title to be transferred. However, there is a possibility that a piece of paper proving transfer to the trust could be useful. For example, if your Successor Trust was required to sell some of the property, a potential buyer may want to see proof of ownership of untitled property if the property was very valuable (eg. diamonds, heavy equipment that is untitled, computers, etc). If the property being considered for sale was owned by you (and that can be proved) before the date that you signed the trust, the trust document itself is sufficient proof of the transfer. The possible problem arises if the property was acquired after the signing of the trust. To resolve this possible problem, you could use a simple form (that might be entitled Declaration ofTrust) that your attorney could provide to you. Simply write into the space provided on such a form the description of the property and the date it was completed, and then sign it. Then it should be placed with your original trust document. That way, it would be available to the
successor trustee upon the death of the Grantor( s).
You may have other kinds of property which were not specifically discussed above. The rule of thumb to remember for all properties is that you can transfer it to your trust by using the same steps that you would use if you transferred it to some other person, and in doing so use the identification explained in the real estate explanation.
Of course, if doubts still remain, contact your attorney. Remember that the key to the Living Trust is the transfer of property to the trust. If the property is not transferred, it may be subject to probate.
If You Have a Living Trust, Do You Also Need a Will?
Yes. But the Will will be different (much more simple) than it otherwise would be, and often it will never be used.
The kind of Will that should be signed along with a Living Trust is frequently referred to by the nickname pourover will. ITS PRIMARY FUNCTION IS TO ACT AS A SAFETY NET to catch any property that was inadvertently not placed in the Trust and direct it to the trust so that it can be administered by your Successor Trustee according to the terms of your trust.
If upon your death there is no property which was not transferred to your trust, your Will will not be used to do anything to your property. On the other hand, if you neglected to transfer some property (or acquire new property after the trust signing and had title placed in your name personally), the Will may need to be used. And if a Will must be used, probate may be necessary.
If the property that was not placed in trust is of minimal value, only a small estates form of probate will be required, a procedure that is much less complicated that the normal
probate. In Oregon, if your property subject to probate (ie. not in the trust) is personal property with a fair market value of less than $25,000, or real property with a gross fair market value of less than $60,000, or a combination of both, a small estates probate may be used. If the property is greater in value than that, the normal probate procedures must be used.
Another function that a Will provides is to appoint a Guardian for any minor children which you have responsibility for. That is a task that the Living Trust cannot accomplish.
Will the Successor Trustee Have to Hire an Attorney?
After your death, it is advisable for your Successor Trustee to see an attorney. If estate or inheritance taxes are due, an attorney (or possibly an accountant) would be needed to assist in filing those returns. Also, upon the death of the Grantor (or both of them if there are two Grantors), the trust may become an entity that must file an income tax return. An attorney or accountant may have to be consulted to assist in filing that return.
With regard to taxes, whether estate or income, the Living Trust neither increases or decreases the amount of the bill or the work involved in filing the return. It simply avoids having those matters handled through a probate.
Often, a brief consultation and/or some simple legal document drafting may be all that
your successor trustee needs of an attorney's services.
What Must You Do to Change the Living Trust?
It is not uncommon to change the terms of a Will or Trust. Your trust can be changed by either having an amendment drafted or by having a restated trust drafted (a reprint of the entire document with the changes implemented but reciting that it is a continuation of the original trust). A Will is changed in much the same way, by having either a codicil drafted (a codicil is an amendment to a Will) or by having the Will entirely redrafted. If you need a change in your Trust, you should contact your attorney. He or she may provide either you with instructions for making the change, or suggest that an amendment or restatement be drafted for you, depending upon the complexity of the change you desire.
The most important rule to remember after deciding to use a living trust is that your property must be deeded, titled, or otherwise transferred to your trust. If you do that, you will save your heirs considerable time, frustration and expense upon your death.
If you still have concerns, talk to your attorney. It will probably take very little time to ease your mind regarding your Living Trust.
At George E. Price, Attorney at Law, we pride ourselves on assisting people in their estate planning with a maximum of thoughtfulness and care and a minimum of cost. Please call (503) 363-7334 or email me today to arrange for a free initial consultation.
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Salem, OR 97301
Phone (503) 363-7334
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