Our task is to avoid a probate at death. To avoid a probate at death, we cannot at death own any property titled in our name. The easiest way to avoid having property titled in our name at death is to have given it all away during life. The task, therefore, is to find some way of “giving it all away during life” while retaining all of its benefits for the rest of our life as well as the ability to control its disposition at death.
What exactly is the problem? To avoid probate, we cannot at death own any property then titled in our own name. So we need to look for a way that allows us to possess and use our property without it being titled in our own name — we need to separate “ownership” (evidenced by our assets being titled in our own name) from “possession” and “use” (our ability to continue to enjoy them).
An ideal legal entity that allows us to separate ownership from possession and use is a Revocable Living Trust. With a Trust, its property is owned and managed by, and titled in the name of, its Trustee. Its property is possessed and used by its Beneficiaries. Furthermore, its Trustee may be its only Beneficiary or among its Beneficiaries, the same person wearing two “hats” at the same time.
Revocable Living Trusts have been serving people for almost 1000 years now. If you are unfamiliar with Trusts, please use some “beginner’s mind.” When many people hear “a Trust,” they think of the Rockefellers, the Vanderbilts, Newport, Rhode Island, Palm Beach, Florida, Rolls Royces, and 5 o’clock tea at the Ritz. Granted, the Rockefellers, the Vanderbilts, and the wealthy in general have their Trusts. The point is: A Trust might work as well for you, too.
How do you create and who are the principal players of a a trust:
|Function or Status||Living Trust|
|1. To create your Living Trust and to set forth the terms and provisions of its operation:||You write a Declaration of Trust (or Trust Agreement) for your Living Trust.
You then transfer your property to your Living Trust in exchange for the right to:
|2. As the person who creates your Living Trust and funds it, you are known as its:||Trustor (also known as its Grantor or Settlor)|
|3. As the person who will receive the benefits of your Living Trust, you are known as its:||Beneficiary|
|4. As the Trustor/Beneficiary or your Living Trust, you will appoint yourself as its manager and be known as its:||Trustee|
|5. And because you don’t want to lock yourself into a situation where you can’t change its terms and provisions if you change your mind or if your circumstances change, one of the terms and provisions that you set forth in your Declaration of Trust is that:||At any time and totally as you see fit, you can change (ie, amend) or revoke your Living Trust or withdraw from it some or all of its property.|
You’re now in business! And, as your first act in business, you, as Trustor, will transfer all your personal assets to and re-title them in the name of your Living Trust (technically, you will transfer them from yourself, in your capacity as Trustor, to yourself, in your capacity as Trustee of your Living Trust). Result:
Side-bar: Some nomenclature: Unless otherwise specified, the Trusts discussed on this website are known:
For income tax purposes, Grantor Trusts are ignored, and all of their tax attributes (income, expenses, tax credits, etc.) are attributed (ie, passed on) to the Grantor during his/her life and reported on the Grantor’s individual income tax return (Form 1040). At the Grantor’s death, Grantor Trust status stops, the Trust becomes a separate tax-paying entity, and its tax attributes are reported by its Trustee on a fiduciary income tax return (Form 1041).
Summary: For income tax purposes, Revocable Living Trusts are “transparent” during the life of the Grantor and take on a life of their own only upon the Grantor’s death, as would that person’s probate estate if he/she had chosen to use a Will, instead of a Living Trust, as his/her estate planning vehicle. As a corollary, Living Trusts cannot be used to obtain income tax savings during the Grantor’s life (a Living Trust and its living Grantor being identical in the eyes of the IRS). As will be discussed further on, the primary reasons for using a Living Trust are:
Bottom-line: This process was created by some of history’s first “estate and tax planners” in order to reduce the “property, income, and death taxes” imposed on the common folk of England upon their defeat by William the Conqueror in the Battle of Hastings in 1066. This process has continued successfully ever since. In its almost 1000 years of existence, its “bugs” have been worked out. You should not expect any “manufacturer’s recalls” except as a result of a future change in the law.
Furthermore, upon creating a Living Trust in the present, if there is any change in the law in the future: