Wills and revocable living trusts are generally revocable. The person creating the trust—known as the grantor—initially transfers ownership of all or a portion of his/her assets to the trust. For example, Mr. and Mrs. Smith may re-title their house so that the house that was titled to Robert Smith and Jean Smith is now titled to The Smith Family Trust.
The trust document gives the grantor complete control over everything, including the right to alter or terminate the trust at any time during the grantor’s life. This means that The Smith Family Trust is completely controlled by Robert and Jean Smith. They have the power to sell, rent or lease the house or take out a second mortgage or home equity loan. They are also personally responsible for all debt on the property.
What happens when a grantor dies
If there is/becomes only one grantor, the living trust becomes irrevocable at his/her death and functions much like a will. If the grantor has been serving as his/her own trustee (the person administering the trust who makes decisions and manages finances), it is important that an alternate trustee be named in the trust document so that there is someone in place to settle the estate and distribute property when the grantor dies. Otherwise, the heirs will have to go to court to have a trustee appointed.
Along with a trust, it is advisable to have a specially drafted will to complement the trust. Such wills are sometimes called pour-over wills, because any assets that were not transferred into the trust prior to the grantor’s death pour over into and become part of the trust at the grantor’s death. When used with a pour-over will, trust assets are distributed by the trustee as directed by the trust, eliminating the need for asset distribution via the probate court.
Managing assets with a living trust
Perhaps the most significant advantage of a living trust is that it can be designed to manage assets in the event a person becomes disabled or incapacitated. While other estate planning tools such as the durable power of attorney can be used to provide asset management in the event of a disability, none is more flexible than the living trust. When used to provide asset management in the event of a disability, the trust is created today, but certain assets are not transferred to the trust unless and until you become disabled.
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A living trust can also be used by those who need current management of their wealth, even when they are competent and healthy. This would include people who have little or no experience handling money and those who would rather allow someone else to handle their finances. For example, a widow who has just received a large inheritance could create a living trust and name a bank or a trusted financial planner as the trustee. The trustee would then invest the inheritance for the widow’s benefit and handle financial affairs. One important aspect of such an arrangement is that the trustee is governed by certain well-settled legal principles that require the trustee to exercise a high degree of care in managing the trust funds. Failure to do so can result in criminal prosecution.
Another reason to consider the living trust is in cases where the grantor owns real estate in different states. For example, if you live in and own property in North Carolina and also own property in Maryland, then upon your death it will be necessary to conduct estate settlement proceedings in both states. If, however, the Maryland real estate is transferred to a living trust, the estate administration in Maryland could be avoided.
Other uses for living trusts
Living trusts are also suggested if a will is likely to be contested. Using a living trust as a substitute for, or in conjunction with, a will may be the best option for those wishing to protect their estate if there is a challenge from heirs. It is difficult to successfully challenge either document. However, the trust requires a higher standard to refute.
There are statutory guidelines for how trusts can be created and a number of technical requirements that must be fulfilled. For proper estate planning and wealth preservation, consult an attorney at Haas & Associates, P.A. to ensure compliance.