Many people start thinking about estate planning by looking to make a will. After all, we have all seen in movies and tv that the first thing you do to plan for your untimely demise is to make a will.
A will can be a great tool. But for most people a living trust coupled with a “pour over” will is a better solution.
But what is a living trust?
Commonly, a living trust (AKA “inter vivos trust”) is a legal agreement that states property is to be held “in trust” (by the trustee or trustees) with the understanding that the property will pass to others (the beneficiaries) upon the death of the initial trustees.
What this means is that you (as the settlor / trustor) put your property into a legal entity or agreement called a trust and name the people you want your property to go to after you die (those people are called the beneficiaries). When you do this you can name yourself as the trustee (the person who manages the property in trust for the eventual disbursement to the beneficiaries) or someone else as the trustee. Usually, when setting up a living trust for estate planning purposes people name themselves as the initial trustee so they can continue to use the property as before and then name a successor trustee to handle distributing the trust assets to the beneficiaries.
I tried to make that as non-legalese as possible, but as you can see there are a few terms you should learn the definitions of before making a living trust.
A good legal dictionary goes a long way…
It is also generally wise to set up a “pour over” will that will state that any property not in your trust at your death should be transfered into your trust to be distributed according to the terms of the trust. This is sort of like a back up in case you forgot to put some of your property into your trust. Usually people will make the successor trustee and the executor of their wills the same person.
Another important thing to do when you make a living trust is to actually fund the trust. This means you must transfer your assets into the trust. Just making the trust agreement is not enough.
Here are some important terms to learn before setting up your trust:
- Revocable (living) trust: A trust set up during life that can be revoked at any time before death.
- Trust Creation: involves a trustor, the intent / capacity to make a trust, a trustee, beneficiaries, and the trust res.
- Trustor: the person who creates a trust. Otherwise known as a grantor, donor or settlor.
- Trustee(s): A trustee is a person or firm that holds and administers property or assets for the benefit of a third party. The trustor can also be the trustee.
- Successor Trustee: If the trustee has named himself/herself as the initial trustee then the successor trustee is named to administer the trust for the benefit of the beneficiaries upon the death or incapacity of the initial trustee.
- Beneficiaries: the person or persons who are entitled to the benefit of any trust arrangement. Usually for estate planning these are your “heirs” or the people you want to take your property when you pass away.
- Trust Res (corpus): The “body” of the trust, this is the property that is transferred into the trust.
About the author: Matthew W. Camphuis is an attorney licensed by the California State Bar and the Central District Court. He focuses on IRS tax debt controversy, IRS tax audit defense, California State Tax Controversy, chapter 7 bankruptcy, estate planning and wills and trusts. His office is located in Ontario, California and he serves the Inland Empire and High Desert communities in Southern California.