What is a Living Trust?
A living trust is one of the means by which individuals can avoid the difficult process of probate. While living trusts can be highly effective for this purpose, however, they have a number of other potential uses. But what is a living trust?
It may be useful to first define trusts generally. Briefly, a trust is a legal arrangement by which it is agreed that legal ownership of certain assets will be transferred from the settlor (that is, the individual who is establishing the trust) to the trust itself. These assets will then be controlled by the trustees, for the benefit of a third party, known as the beneficiary.
Inter Vivos and TestamentaryLiving trusts are more accurately termed ‘inter vivos’ trusts – literally, ‘among living beings’. Most simply, they can be seen as the legal opposite to testamentary trusts, which are not fully constituted until after the death of the settlor. Thus, a living trust is constituted during the lifetime of the settlor, and also comes into effect within this period.
Anyone can establish a living trust, as long as they have assets to transfer into it. One of the most fundamental concerns many individuals have about living trusts is that they will be required to give up the legal title to the assets in question. While this is indeed the case, it is still possible to derive the benefit from, and use of, these assets. To all intents and purposes, therefore, the assets will still be yours.
Furthermore, it is perfectly possible for the same person to be named settlor, beneficiary and trustee. In this case, while the assets will be legally owned by the trust itself, the settlor not only derives the benefit from them, they also have total control over their disbursement within the boundaries established by the trust documents.
ProbateAs has been mentioned, living trusts are most commonly used as a form of inheritance planning. Assets placed in trust will not be subject to the process of probate, which can be time-consuming and expensive. It is possible to make provision in a living will for the trusteeship and role of beneficiary to pass to another individual upon the death of the settlor; as a result, the assets will pass straight to the intended recipient without the need for probate or administration.
Living trusts can, however, be used for a number of other purposes. Building on the concept of successor trustees, as used in probate avoidance, living trusts can be constituted that make provision for the responsibilities of trusteeship to be passed to another individual in the event that the settlor (if this is the same person as the original trustee) is incapacitated.
This is similar to the concept of a living will, and can be useful in offering peace of mind to those who are concerned that their assets should be dealt with correctly in the event that they became unable to do so themselves.
Living trusts can be a complicated area, and legal advice should always be sought before attempting to constitute one. Further information on specific areas concerning living trusts is available elsewhere in this section.