It is time to get back to basics.
“Trusts” or “living trusts” are confusing words for many setting up estate plans.
Some think a trust is synonomous with a will. Others believe a trust is better than a will, but they are not sure why.
To understand how a trust works and its purpose, it is helpful to be aware of the three relationships essential to the existence of a trust: trustor, trustee and beneficiary. A trust is created when a trustor entrusts assets to a trustee for the benefit of a beneficiary. The person who sets up a living trust becomes the trustor, the trustee and the beneficiary, all at once. Thus, a living trust can best be understood as a separate entity that holds title to your assets, but over which you have complete control and from which you receive exclusive benefit during your lifetime. It is referred to as a living trust because it is created during the trustor’s lifetime.
The living trust is designed to take the place of the last will and testament, but it is not the same thing as a will. At death, the trust continues to exist, but a new trustee designated by the trustor takes control of the trust assets and distributes them to the beneficiaries according to the wishes of the trustor. The trustee may also hold the assets for the benefit of beneficiaries, if that is what the trustor wishes.
Because the trust continues to exist after death, the trustee has the power to distribute or control the trust assets without the involvement of the probate court. Avoiding probate is a major benefit of a trust over a will. See our future post on the benefits of a living trust.
Although a living trust takes the place of a will, it is still recommended to have a will. Check back here for a future post with more information on pour-over wills.
Often words other than “living trust” are used. Don’t let the terminology fool you. Living trusts are also referred to as revocable trusts or intervivos trusts. These are just different words for the same thing.
When starting your estate planning, be informed. Knowing the basics of estate planning is essential to creating a plan that actually carries out your wishes. It’s your life and your legacy. It should be your plan.