A Will and a Living Trust - Two Vital Components of Your Estate Plan

This article explains how using a living trust, in addition to a will, can help you develop an effective estate plan.

Q. What are the differences between a will and a living trust?

A. A Will is basically a set of instructions to your executor as to how you wish your property to be distributed to your beneficiaries after your death, and it does not become effective until you die. The passing of property under a Will is accomplished by probate proceedings, which is a court procedure done to establish the validity of the Will. This process involves legal fees and court costs, and can it be a lengthy and costly affair.

A Living Trust is an arrangement in which a person (the "grantor" or "settlor") places their property into trust,  transferring title to all of the property over to the trustee, who holds it on behalf of the beneficiaries of the trust. This is done during your lifetime. You can name yourself or someone else as the trustee.

The Trust Declaration provides that upon the grantor's death, the property will pass from the to the designated beneficiaries, thus avoiding the probate process. A revocable living trust also provides that the grantor can amend or revoke the trust or change the trustees at any time. 

An Irrevocable Living Trust, on the other hand, is one that cannot be revoked or changed. It has most of the advantages of a revocable trust and is a good way of gifting property to minors.

Under current US laws, placing assets in a trust will avoid probate, may avoid estate taxes in some circumstances, avoid accruing income taxes to the grantor, and the trustee can manage the property for the beneficiaries if necessary.

Q. How does a living trust work?

A. The grantor transfers their property to one or more trustees, who pay the grantor all the income from the trust during the grantor’s lifetime, together with whatever part of the principal the grantor may request. Upon the death of the grantor, the trustee pays the estate expenses and distributes the rest of the trust assets to the beneficiaries.

The trustee has the authority to manage the trust assets as necessary, including collecting income from rental properties, buying or selling assets, and managing business and real estate holdings. The trustee can also pay emergency hospital and medical bills and other expenses of the grantor, during the grantor’s lifetime.

Q. Are there advantages to transferring estate assets through a living trust instead of under a will?

A. There are several good reasons to put your assets into a living trust:

• Besides avoiding the probate process associated with proving a will, a living trust also avoids the potential for someone to contest the validity of the will, and the associated unwanted publicity.
• If at the time of death the grantor holds property in more than one state, holding the assets in a trust avoids the necessity of administering the assets in a jurisdiction outside the state of residency, as would be necessary if they were being transferred under the terms of a will.
• In some cases, distributing estate assets by way of a living trust can reduce estate taxes.
• Using a trust as a means of managing and transferring assets helps protect the grantor's privacy, as opposed to probate proceedings which are a matter of public record and open to public scrutiny.

Q. What happens if I have inadvertently left the same asset to two different people – once under my will and once in my trust declaration?

A. The living trust declaration will always take precedence over the will, regardless of which of them was executed first.

Q. If I place my assets into a living trust, why do I also need a will?

A. Once you place your assets and property into a trust, title to those assets transfers to the trustee and you are no longer the owner of the assets, meaning that your will has no effect over them. BUT if you own any assets that you may have forgotten to place into trust, those assets will go to your closest relatives in accordance with State succession laws if you do not have a will. You can make a simple will called a "pour-over will" to make provision for any assets that you intentionally or unintentionally excluded from the trust.

Q. What types of property should be transferred to the trustee of the living trust?

A. Any assets that produce income (such as rental property) should be placed in trust, and anything of value - expensive jewelry, artwork, vintage autos, and similar items - should also be transferred to the trustee. It's not necessary to place personal items (furnishings, electronics, etc.) into trust.

Q. How do I put my assets into trust?

A. All real estate property would be transferred into the name of the trustee under a warranty deed, quitclaim deed, or similar form of transfer instrument (check with your County Clerk's Office for details).

Financial assets and investment accounts (stocks, bonds, mutual funds, bank accounts, retirement funds, etc) can also be signed over to the trustee. In each case you will need to check with the financial institution or corporate issuer to determine the proper transfer process. They may require a copy of the trust deed in order to complete the transfer of ownership.

Vehicles generally have a certificate of title that is recorded with the Motor Vehicle Department. The trustee’s name must be entered on the title certificate. Check with your local DMV office to see what their requirements are.

Remember that the trustee holds title to the assets in name only. The beneficial owners of the property are the beneficiaries of the trust.

Q. Can I name myself as the beneficiary of the trust?

A. Yes, but with one exception. If you are the sole trustee of the trust, you cannot also be the sole beneficiary. If you are the sole beneficiary, you must name someone else to act as trustee or as a co-trustee along with yourself. If you are going to act as sole trustee, the trust must have at least one other beneficiary.

Q. Some of my assets are community property which is also owned by my spouse / partner. Can I put these into a Living Trust?

A. If you plan to place any assets that are considered community property into a Living Trust, your spouse / partner should also execute the trust deed. Consult the specific community property laws for your state to find out what applies to you. You should probably seek legal advice as well.

Q. What about marital property?

A. Marital property rights laws vary from state to state. It is recommended that both spouses sign the trust deed as co-trustees, to hold all of their assets for the benefit of both of them during their lifetimes, and upon the death of either spouse all assets go to the surviving spouse. If both spouses die at the same time, the trust deed should provide that the trust property then passes directly to the designated beneficiaries (children, parents, siblings, etc.)

Q. If I am not going to act as the trustee, who should I choose instead?

A. If you plan to name someone other than yourself as trustee (or as co-trustee to manage the trust jointly with you), remember that your trustee is being asked to take on a lot of responsibility and may have to act in this role for many years. This choice should be made with great care and deliberation. Family members, close friends – these should be the first people you approach. You must get the person’s consent before appointing them as a trustee under the Living Trust Deed.

If you plan to appoint a lawyer or bank trust company as trustee, be aware that they will charge you for their services. However, if management of a business or other investments are involved, you may wish to use a professional management firm or a person with extensive business experience. Generally speaking, any natural person, including the grantor, can hold property in trust in the same way that a person can hold their property for their own benefit. However, in the state of New York, the grantor may not be the sole trustee – you must name someone else to act as your co-trustee.

Q. What should I do if the trustee dies before I do?

A. You can appoint one or more successor trustees to take over in case your trustee dies or becomes unable or unwilling to continue to act. If all of your successor trustees also die or become unavailable, a Court can appoint a successor.

Q. Can my trustees be held liable for their actions?

A. Yes. A trustee is responsible under the law to you as the grantor and to the beneficiaries of the trust, and can be sued and even imprisoned for dishonesty or dereliction of duty.

Q. Is a living trust the only way to avoid probate of an estate?

A. There are several other ways to avoid the probate process, such as:

• joint ownership (also called joint tenancy) of property with right of survivorship,
• gifting property, and
• life insurance payable to beneficiaries other than the insured or to the insured’s estate.

Ownership of jointly owned property with right of survivorship automatically transfers over to the surviving owner whe one of the owners dies. This is the easiest way to ensure that your real estate, bank accounts, mutual funds, stocks, bonds, vehicles, antiques, and other valuable property are transferred to the correct person. Make sure that you comply with any title certificate or recording requirements of your state.

Gifting property means just that - you give it away and you no longer own it. Be careful when gifting property, however, because for recipients other than your spouse, gift taxes can be assessed on property over a certain value. Always consult a lawyer with expertise in estate tax laws before gifting any valuable assets.

Generally speaking, life insurance is payable directly to the designated beneficiaries and does not form part of an estate. And you can avoid estate taxes on insurance if you and your estate do not retain any ownership or interest in the insurance contract. You can have your spouse or another family member hold the life insurance policies on your life, and it will not become part of your estate for probate or tax purposes.

Q. So let's say I set up a living trust. What if I later decide I want to make changes to the trust or cancel it altogether?

A. As far as making changes, you can attach a schedule to the Trust Deed listing the trust property. If and when you need to add more property, or withdraw assets from the trust, you can make the changes to the schedule rather than to the Trust Deed, and replace the original schedule with the amended version.

If you want to revoke the trust agreement, you need to sign a Revocation of Revocable Living Trust form and record the revocation everywhere that the trust deed has been registered, such as the county records office. When you sign the Revocation and give it to the trustee, the trust is terminated.