Explanation of Living Trust
A living trust is a legal vehicle that can help you manage property, avoid probate and potentially reduce your taxes. Technically, a trust is a legal relationship involving three parties, the trustor, the trustee and the beneficiary. A trust is a useful legal device for holding certain kinds of properties, such as investment real estate, but other property, such as personal bank accounts and cars, are best left out of the trust.
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Generally
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A living trust is a trust that you create while you are alive. The trust generally remains in existence even when you die, which makes the trust a useful tool for avoiding probate. Probate is the legal process by which a court interprets and carries out the terms of your will. A different kind of trust is a testamentary trust, which is a trust that springs into existence as soon as you pass away. In a testamentary trust, the trust is funded with property that passes by your will. In a living trust, you fund the trust while you are still alive.
Significance
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There are many reasons for creating a living trust, but the most common purposes of the living trust include providing for the professional management of your property while you are alive, avoiding probate of your property when you die, and minimizing taxes while you are alive. Keep in mind, though, that whatever property you put in trust is no longer owned by you but is instead owned by your trust (technically, owned by the trustee of your trust).
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Trust Parties
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You, the person who creates the trust, is called the "trustor." When you create the trust, you will name a "trustee" who is the person or business that manages the trust property. Legally, a trustee can be anybody you want, but for practical reasons, you should probably choose a professional such as an attorney or the trust department of a bank. Finally, you will name one or more beneficiaries. The beneficiaries are the people who receive the trust income or disbursements. For example, if you have an apartment complex that you put into trust and you name yourself and your spouse as the beneficiaries, then the trustee will manage the apartment by renting out to tenants, and whatever rental income is produced, the trustee will give to you and your wife, the beneficiaries.
Revocable v. Irrevocable
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A living trust can be either revocable or irrevocable. The trustor (you, the person who creates the trust) can decide which type of trust you want. A revocable trust is handy because you can terminate the trust anytime you want. An irrevocable trust is less flexible because if you ever want to terminate the trust, you will have to get permission from the trustee and all of the beneficiaries. However, if you want to use a trust to save on taxes, the trust will most likely have to be irrevocable.
Property to Put in Trust
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Real estate is a great type of property to place in trust, especially investment or income-producing real estate. You can also place money market accounts, gold, family jewels, and other property in trust, which can be convenient when you die because that property just remains in trust, which means it does not have to go through the often expensive and time-consuming probate process. Property that is not wise to place in trust includes personal checking or savings accounts that you use on a regular basis, life insurance accounts, personal automobiles and retirement accounts.
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