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- The assets to be placed in trust
- Your instructions for their management and distribution
- The person or institution to serve as your trustee, managing the assets in accordance with the provisions of your trust agreement
Revocable vs. Irrevocable
In the trust agreement, you specify whether your trust is revocable or irrevocable.
A Revocable Living Trust lets you reserve the right to change or revoke the trust agreement to accommodate your needs as they change throughout your life. For instance, a major family eventmarriage, birth, adoption, death, divorcemay prompt you to consider changing the provisions of your trust. Upon your death, the trust agreement becomes irrevocable.
Northern Trust distinguishes a Living Trust, under which the grantor names a third party to serve as trustee, from a Self Declaration of Trust, under which the grantor serves as trustee. For more information on Self Declarations of Trust, please see our Topics in Estate Planning publication of the same title.*
Once established, an Irrevocable Trust cannot be amended or terminated. A grantor who wishes to "cement" a personal commitment would draft an irrevocable trust agreement.
Your Living Trust can be fashioned to satisfy a variety of purposes. For instance, your trust might include provisions to:
- Care for any number of beneficiaries, including yourself
- Provide income to your spouse for life, with the remainder of the trusts assets to be distributed to your heirs upon your spouses death
- Provide for your childrens education or marriage
- Distribute assets in stages to beneficiaries (for example, upon the 25th birthday of each child)
- Assure the care of a disabled or elderly dependent
- Authorize discretionary distributions in the event of urgent, unforeseen need
- Furnish a legacy to a favored charity
Continuity of Management
A Living Trust protects your rights and interests in the event that you become physically or mentally incapacitated. Without a Living Trust, if you become incompetent the law requires that you and your assetsincluding your business, residence, and investmentsbe placed in the care of the court. The court would retain control until you could prove your competency or until your death, when your Will would take effect.
By contrast, with a Living Trust there is no change in the management of your assets, despite any change in your health. Should you fall ill your trustee simply continues in that role, administering your assets and assuring your well-being as your trust agreement specifies. Your trustee pays personal and household bills, medical expenses, and taxes, and oversees other financial affairs for as long as necessary. Upon your death, the trustee pays your debts and distributes your assets as you have instructed in your trust agreement.
A Living Trust allows your family to become familiar with the trustee's service throughout your lifetime. By the time of final distribution, your loved ones and the trustee will have become well-acquainted. Such familiarity can be most reassuring.
When an estate is conveyed through a Will, the probate court must validate the Will before its provisions can be executed. The probate process can require up to two years. Assets held in a Living Trust, however, are not subject to probate. The advantages of avoiding probate are several.
- Expedited Distribution. A Living Trust allows assets to be distributed to your heirs as quickly as your trust agreement instructs and the taxing authorities allow, without the additional delays of probate. Your spouse, for instance, could receive income to provide for living expenses immediately.
- Expense Reduction. The expenses of probate are completely avoided for all assets held in your Living Trust.
- Privacy and Confidentiality. When a Will is entered into probate, all of its provisions become a matter of public record. Since a Living Trust is a private arrangement, its terms are not made public at your death. Your assets and intentions are known only to your trustee and beneficiaries.
Resistance to Challenge
A Living Trust may be more resistant to estate challenge than a Will. It is difficult to challenge the validity of a trust that was established properly and operated successfully during one's lifetime.
Many people are surprised to find that their Wills become less effective when they relocate to another state or country. A Living Trust maintains its validity no matter where you choose to reside.
With proper planning, a Living Trust can be drafted to deliver the following additional advantages.
Federal estate taxes can claim up to 55% of your estate, before applicable state taxes. Your tax advisor and estate planning professional can help you structure your trust to reduce this burden. For instance, for a married couple, terms could be written to minimize overall estate tax liabilities by dividing assets into separate trusts. Request a copy of our Estate Planning brochure for additional detail.
Professional Investment Management
Unlike a Will, a Living Trust can assure that your assets are managed to meet your lifetime income needs and wealth perpetuation goals. Professional fiduciaries such as Northern Trust provide investment management and securities custody as part of their standard service.
Establishing a Living Trust is a deliberate process. Following is a summary of the steps involved. Your tax advisor, attorney, and estate planning professional will guide you through the various tasks associated with each step.
Select an Attorney
It is important to identify an attorney with experience in estate planning, specifically in establishing Living Trusts. Northern Trust can suggest for your consideration a number of qualified attorneys.
Consult Your Attorney and Tax Advisor
You must determine whether a Living Trust meets your needs, and how it could best be structured to minimize estate taxes.
Determine the assets that you wish to place in trust. Segregate assets that you hold personally from those held in joint tenancy. For purposes of probate avoidance, it is important that as many personal assets as possible be placed in trust.
Specify Lifetime Management Needs
Decide how you wish the assets to be managed during your lifetime. Consider your current income needs and growth objectives.
Specify Beneficiaries and Distribution
Identify the individuals and charitable concerns to whom the trust is to make distributions after your death.
Select a Trustee
This individual or professional fiduciary will be responsible for administering your assets during and beyond your lifetime. You might elect to name an individual and a professional fiduciary to serve as co-trustees. You also should name a successor trustee in the event of the original trustee's resignation, unsuitability, incapacity, or demise.
Draft Your Trust Agreement
Work with your attorney to draft a document that achieves your estate-planning objectives and reflects your personal intentions. File a copy with your trustee and successor trustee. A typical revocable trust agreement would cover, among others, the following points.
- Designation of the trustee.
- A statement of the investment powers granted to the trustee.
- Instructions for payment of income and principal during the grantor's lifetime and for distribution of assets thereafter.
- Instructions for the trustee to maintain records of the trust's income, disbursements, and principal transactions.
- Specification of any additional responsibilities assigned to the trustee.
- A statement of the terms under which the trust agreement may be amended or revoked.
(To be effective, any amendment or revocation should be placed in writing and filed with the trustee.)
- Designation of a successor trustee.
Fund Your Trust
Change the legal title of your specified assets from your name to that of your trust. Your attorney will help ensure that all assets are properly re-registered. If applicable, remember to:
- List all unregistered (bearer) securities on a separate schedule, and assign them to the trust
- Change the beneficiary of life insurance policies to the name of the trust
- Convey real estate to be held in trust to the trustee
- Deliver all certificates and evidences of ownership to the trustee
- Attach a schedule of assets to the trust agreement
Expense and Effort
Your attorney will, of course, charge a fee for drafting your trust agreement, and may charge additional fees for arranging asset transfers and counseling family members. Once the trust is established, it is wise to consult periodically with your attorney and tax advisor to ensure that your estate plan and tax strategies remain up to date.
How to Find out More
If you would like additional information on Living Trusts, get in touch with us. A Northern Trust estate planning professional would be pleased to assist you.
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