Q. My wife and I don’t really understand what a “Living Trust” is and how it is different from a Will. Can you help us understand it?

A. Yes. A “Living Trust”, is a legal document which (1) provides for asset management in the event of your incapacity, and (2) allows your assets to go to your intended beneficiaries upon your death without the expense and delay of probate. By comparison, a Will does not provide for the management of your assets in the event of incapacity, and usually requires a court probate proceeding to distribute your assets, a process which is typically more time consuming and expensive.

The Living Trust is a legal arrangement whereby you, as “trustees”, hold legal title to your property. Attorneys often refer to is as a “Revocable Trust”, as it can be revoked by you during your lifetime if you wish.

As the creator of a revocable trust, you typically wear three (3) hats: (1) you are the “Trust Maker” (aka “Settlor”, or “Grantor”); (2) You are the Beneficiaries of your trust; and (3) you are the “Trustees” of the trust property. Married couples usually serve together as Co-Trustees.
Even though the assets are held by you as “trustee(s)”, you and your spouse still remain the real owners and you can manage assets placed into trust just as you always have.

An important difference between a Trust and a Will: in the event of your incapacity, a co-trustee (typically a spouse or adult child) can step in and manage the trust property for your benefit. While you might also accomplish this through a Durable Power of Attorney, banks and other financial institutions are often much more comfortable with trusts. Indeed, they have been known to reject Durable Powers of Attorney, especially if they are more than a few years old.

The secret to making revocable trusts work is to “fund” them. This means re-titling assets in the names of the trustee(s) of the trust. To place bank and investment accounts into your trust, you need to retitle them. Assuming your names are John and Mary Smith, you would re-title assets as follows: “John Smith & Mary Smith, as Trustees of The Smith Family Revocable Trust created [date].” As to bank and brokerage accounts, the financial institutions will also require a copy of a summary of the trust (called a “Certification of Trust”), which affirms the existence of the trust, the identities and powers of the Trustee(s), and their signatures.

To transfer your home into your trust, you will need to sign a deed transferring it into the trust, by deeding it to yourselves “as trustees”. Of course, the home will still remain yours, as before, notwithstanding this deed and you can continue to manage it as you wish.

All too often, attorneys draw up Trusts, advise clients to fund their Trusts, and then nothing happens. This omission can undermine the Trust, as the Trustees (and, especially, your successor trustee) would then not have legal control over assets that have not become part of the trust. However, if you execute “pour-over” Wills, along with your trust, saying that at your death all of your assets are to be distributed to your Trust, your wishes as to the ultimate distribution of your estate can still be honored. However, in that event, a probate proceeding would be required to formally transfer your assets into the trust. Further, if you do not fully fund your trust during your lifetime, your successor trustee may not be able to manage your assets for you in the event of your incapacity.

As long as you are serving as your own trustee or co-trustee, you can use your own Social Security number for the trust on your usual, individual tax returns. As before, you will still be taxed on all of the trust income.