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Estate Planning Basics


A trust can help avoid probate, reduce estate taxes or establish up long-term property management. What is a trust? A trust is a legal arrangement in which the grantor transfers control of his or her property to a trust, which is managed by a trustee. A trust has three elements: property, a trustee and beneficiaries.

What is a Trustor? A Grantor? A Trustee?

The creator of the trust is referred to as the grantor or often the trustor. The trustee is the manager of the trust. The grantor can serve as the trustee or can select a person or an institution to be the trustee. The grantor names a person who will serve as trustee and will follow the trust's terms after the grantor dies. What is a living trust? A living trust, commonly referred to as “inter vivos”, is a trust created while the grantor is alive and allows control of the distribution of the estate. For a living trust to take effect, the title to any bank accounts, stocks, or real estate owned by the grantor must be transferred into the trust.

What is a Testamentary Trust?

A Testamentary trust is created as part of a will and becomes effective upon the death of the person making the will. It is commonly used to conserve or transfer wealth. A Testamentary trust offers the trustor control over his or her estate distribution. A Testamentary trust can provide for a child's education or can delay the receipt of property by a child until the child gains financial maturity. A Testamentary trust does not save money in estate taxes or probate fees. The main objective of a testamentary trust is to save on estate taxes while preserving income for the surviving spouse by passing assets to children in a “credit shelter trust” or to establish a “marital deduction” trust for the surviving spouse.

How does a living trust avoid probate?

A living trust can avoid probate, unlike a will, because the trust owns the assets, not the deceased. After the death of the grantor, the trustee transfers ownership of titles in the trust to the beneficiaries. Often, the process will take a few weeks and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the living trust ceases to exist.

Is a living trust document ever made public, like a will?

No. A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate. The terms of a living trust, however, need not be made public.

Does a living trust protect property from creditors?

No. A creditor who files and wins a lawsuit against you can go after property held in a trust. After the death of the grantor, all property and assets are subject to the grantor’s lawful debts.

Does a Living Trust avoid estate taxes?

A living trust can be a valuable estate and tax planning device and may contain provisions taking effect at the time of the grantor’s death which do save on taxes. However, there is no inherent estate tax advantage to using a living trust.

Does a trust avoid income taxes?

There are no substantive income tax advantages in the use of a living trust. The grantor is treated as the owner of the trust for income tax purposes and is required to report all trust income on his or her personal return under the "grantor trust" income tax rules.

Do I need to file a special tax return for my trust?

With a revocable Living Trust, no special tax forms are required as long as a married couple or one person alone is receiving all the income from the trust. However, with an Irrevocable trust, income must be reported using IRS form 1041 once per year.

Can I Still Borrow on the Assets in the Trust?

Yes, our assets are contained in the trust, you can still borrow on those assets. Lenders will probably want to see a copy of the trust documents.

Can a Living Trust be contested?

Yes. A trust can be contested in a special proceeding. There is no blanket rule that a living trust cannot be contested.

Revocable or irrevocable?

Living trusts can be "revocable" or "irrevocable." A revocable living trust offers the grantor the freedom to change the terms or cancel a living trust. Additional benefits of a revocable trust include the ability of the grantor to:

  • Add or withdraw some assets from the trust during your lifetime;
  • Change the terms and the manner of administration of the trust; and
  • Retain the right to make the trust irrevocable at some future time.

An irrevocable living trust may not be altered or terminated by the trustor once the agreement is signed. There are two distinct advantages of irrevocable trusts:

  • The income may not be taxable to the trustor; and
  • The trust assets may not be subject to death taxes in the trustor's estates. However, the benefits of an irrevocable living trust will be lost if the trustor is entitled to:
  • Receive any income;
  • Use the trust assets;
  • Otherwise control the administration of the trust in a manner that is inconsistent with the requirements of the Internal Revenue Code.