A trust is a legal arrangement in which you (the "trustor" "settlor" or "grantor") place property into trust for the benefit of one or more "beneficiaries". A living trust is a specific type of trust which is created to begin operating during life ("inter vivos") when you sign an agreement or declaration which names one or more "trustees" to manage the trust. The trustee will eventually be responsible for distributing the assets of the trust according to the terms of the trust document. You can name any person, including yourself, or an institution to be a trustee or co©trustee. In addition, you can designate a successor trustee to act if the initial trustee dies, resigns, becomes physically unable to act as trustee or becomes mentally incapacitated. The trustees you select are bound by law to follow your instructions concerning management and distribution of the trust assets.
Property must be transferred into the trust during your lifetime to provide for its management by the trustee during your lifetime and to avoid probate at your death. The process of transferring property into the trust is known as "funding". After the establishment of the trust, all transactions involving trust property are conducted in the name of the trustee. A simple will is usually needed to "pour over" to the trust any property which was not transferred to the trust during the trustor's lifetime. To take advantage of the benefits of a living trust, though, all assets should be transferred to the trust if possible.
Assets of all kinds can be transferred to a trust, including bank accounts, real estate, stocks, mutual fund shares, cars, jewelry, and business or farm interests. With a living trust, you can accomplish all of the following goals:
- Maintain control of your assets and manage your investments during your lifetime, if you so desire;
- Provide for management of your assets should you become incapacitated or not wish to manage them;
- Provide for the management of trust investments at your death, if beneficiaries are minors or are inexperienced;
- Arrange for your spouse to receive income for life;
- Arrange for the trust principal to be distributed to your children at the death of your spouse;
- Specify the circumstances under which distributions are to be made and in what amount; and
- You can change the terms or revoke the agreement any time financial circumstances or family relationships change.
The terms of a revocable inter vivos trust maybe changed or cancelled at any time during the trustor's life, so long as the trustor is legally competent. Therefore, this trust is often chosen by individuals who want to create a flexible estate plan, retain control of their assets during their life, and minimize estate taxes and avoid probate at death. When the trustor dies, the successor trustee gains immediate control over the assets and distributes them according to the terms of the trust.