Two of the most common estate planning tools are wills and trusts. While almost everyone has some idea of what a last will and testament is, many people are hazy on the details of what a trust is. Adding to the lack of clarity is the use of the term “living trust,” which is heard increasingly frequently. What exactly is a living trust? What are its advantages? If you have a living trust, do you still need a last will and testament?
Understanding Living, or “Inter Vivos” Trusts
Another name for a living trust is an “inter vivos” trust. “Inter vivos” is a Latin phrase that means “among the living,” and it simply means a trust that is created during one’s life, as opposed to a testamentary trust, one that springs into being at death by operation of a last will and testament (which requires probate, and is discussed in our blog post on probate in Colorado).
In order for a trust to exist, there must be a trustmaker, a trustee, and a beneficiary. The trustmaker is the person who creates the trust agreement. The trustee is responsible for carrying out the terms of the trust agreement; this agreement is, essentially, a contract between the trustmaker and the trustee. The beneficiary is the person who benefits under the trust agreement; there may be multiple beneficiaries. During the trustmaker’s life, he or she may occupy all three roles: trustmaker, trustee, and beneficiary.
The trust agreement does not just give the trustee the power to manage the assets in the trust, but provides specific instructions about the assets’ management and distribution during the trustmaker’s life, and after the trustmaker’s death. The trust agreement will usually identify a successor trustee—someone who will serve as trustee when the original trustee is no longer able or willing to do so. During the trustmaker’s life, he or she may revoke or amend the trust at any time. Upon the trustmaker’s death, the trust becomes irrevocable, and can no longer be changed.
Why Create a Living Trust in Colorado?
For some people a motivation for creating a living trust is to avoid Colorado probate and the court system at death. If this is your reason for creating a trust, you must make sure the trust is properly funded; otherwise, your trust will be less effective than you intended, and possibly useless. A trust agreement creates a trust, but unless the trustmaker has properly titled assets in the name of the trust, the trust has no practical effect. Assets that remain in the trustmaker’s individual name at his or her death are subject to probate, as if the trust had never been created.
Other reasons trust planning has become very popular include the increased privacy that a trust plan may provide, since the trust is not administered in the court system after death, and the enhanced disability management that a revocable living trust can provide. In the event of disability, trust plans usually provide for a successor trustee. The successor trustee is a “principal” and, as a principal, has more authority than an agent under a power of attorney. It is difficult for third parties to question the authority of a principal.
A living trust does not automatically have a tax benefit for the trustmaker or his or her beneficiaries. However, there are certain types of more complex living trusts that are designed to minimize federal estate taxes. As a practical matter, however, most people do not have an estate that is sufficiently large to trigger estate taxes, so this is not a motivating factor for them to use a living trust.
If you don’t care about avoiding probate, and your estate may not be subject to estate tax, is there any reason to have a living trust as part of your estate plan? Yes, if you want to maintain control over not only who receives assets from your estate, but how and when they receive them. Often clients want to provide for their spouse, but also to protect their children in the event that the surviving spouse remarries. In addition, many people want to provide for their children in a manner that makes it more difficult for the children’s creditors or ex-spouses to access the assets.
An experienced estate planning attorney can explore your goals and concerns with you and advise you as to whether a living trust is right for your needs. When contemplating the idea of creating a trust in your estate plan we firmly believe, “it is not about how much you have, it is about how much you care.”
Even if you have a living trust, you should still have a last will and testament. A will allows you to do certain things that a trust does not, such as name a guardian for minor children after your death. A will also dictates the distribution of any of your property that does not come under the umbrella of ownership by the trust.
If you would like to learn more about the various types of living trusts and how they could benefit you and your loved ones, speak to one of the experienced probate and estate planning attorneys at Davis Schilken, PC. Contact us at 303-670-9855 to arrange a consultation at one of our two locations in The Denver Tech Center and Golden, Colorado. We look forward to working with you.