What is Living Trust & How Does it Work?
Looking for a top trust lawyer Phoenix, AZ has to offer? Wondering if you even need a living trust? A lot of people think estate planning is only for the rich and old, but that’s just not true. At Kamper Estrada, LLP, our experienced attorneys understand that estate planning is about helping, protecting, and providing for yourself and your family for generations to come. One of the best ways to do so is with a living trust.
What is a living trust?
Living trusts are also known as “revocable trusts”. It is an entity created during a Grantor’s lifetime to hold assets, for the purpose of distributing them after the Grantor’s death. If at any time the Grantor decides they no longer want the trust, they have the right to revoke it. There are many benefits to having a living trust in place, ultimately it is up to you to decide what is best for you and your loved ones.
As a firm with a trust lawyer Phoenix, AZ respects, Kamper Estrada, LLP can assist in setting up the two types of living trusts:
- Revocable: A living trust can be revocable, which means assets are transferred into the name of the trust, but the Grantor retains the title and ability to alter them. A revocable living trust can be changed or revoked right up until the Grantor’s death. Revocable living trusts are the most common.
- Irrevocable: A living trust can also be irrevocable, meaning the Grantor relinquishes all their control and interest in assets to the trust. Once the trust retains title to the assets, the Grantor can no longer change or revoke anything.
Do Living Trusts Pay Taxes?
People often set up a trust to makes things easier on their family when they pass away, and to provide for the future of their family. However, taxes on trusts can sometimes make things very complicated. The short answer to the question “do trusts pay taxes?” is . . . well, . . . it depends.
The long answer, as a trust lawyer Phoenix, AZ endorses might say, is that the structure of the trust will greatly influence how complicated the taxes will be. If simplicity is the goal, provisions can be included to accomplish that. And if complicity is the goal, lawyers can easily make things complicated. Trusts are taxable entities, however, who pays the taxes (the trust itself or the individual who created it) can vary depending on how the trust was set up.
- Grantor (Revocable)Trusts: In a Grantor trust, sometimes called a “revocable trust” the Grantor (the person who created the trust) usually retains the right to add and remove assets from the trust. When the Grantor retains this sort of control, the benefit is such that the trust itself generally does not need to file its own tax return. Rather the Grantor, the person creating the trust, would file their own individual tax return and list any income from the trust assets.
- Non-Grantor (Irrevocable) Trust: In an irrevocable trust where the Grantor doesn’t have the ability to add and remove assets, the trust is considered an independent entity that owns the assets and the trust itself must file a tax return. If money is distributed to the beneficiaries, then whether it is taxable or not to the beneficiaries will depend on whether principal or income was distributed, and if it was income, then whether it was tax-free income or retained income from previous years that the trust has already paid tax on. If a trust distributes money to a beneficiary, the trust may also be entitled to deductions for any distributable net income. After that, any leftover income gets taxed directly to the trust.
The Top Advantages of a Living Trust
As a trust lawyer Phoenix, AZ respects might attest, below are some of the most well-known advantages of creating a living trust:
- Avoid Probate: Unlike a will, living trusts are not subject to the legally lengthy and often expensive probate process. Avoiding probate will relieve your loved ones of undue stress during what will already be an emotional time.
- Difficult to Contest: Your living trust requires you to interact with it while you are still alive, evidencing your intent and competence to manage your affairs in a particular manner. This makes contesting a living trust both rare and difficult.
- Successor Trustee: You (as opposed to the court) have the authority to name the person(s) who will be in charge of your estate after your death.
- Incapacity: You (as opposed to the court) have the authority to name the person(s) who will act for you in the event you are incapacitated.
- Continuity: Upon your death, a trust continues to operate uninterrupted. If you plan for income to be distributed, those distributions can be made in a timely manner. With a will, distribution is often delayed due to probate and the gathering of assets. In a trust, everything is right where it needs to be.
- Privacy: When a will goes through probate, it becomes a public document. Because a living trust does not go through that process, it protects your assets and wishes from becoming publicly accessible.
Do I need a Living Trust?
There are many benefits to having a living trust in place, ultimately it is up to you to decide what is best for you and your loved ones. An experienced trust lawyer Phoenix, AZ provides might recommend a Living Trust if:
- You have a lot of assets
- You own property (especially in more than one state)
- You have young children
- You have an extended family
Common Trust Challenges
Trusts are often considered a secure form of estate planning. While that is generally true, there are still a few things that can cause a trust to be challenged and end in litigation.
- Who can Challenge a Trust
Only someone with “standing”, also known as an “interested person” can challenge a trust. An interested person who is someone who:
- Is a named beneficiary of the Trust
- Would benefit if the Trust was found invalid
Interested persons may include spouses, children, heirs, devisees, or anyone who may have a claim against the estate.
- Challenges to Plan
Lack of Capacity
Challenging a Trust on the basis of capacity typically requires showing that the decedent did not understand the nature and extent of the property or the identity of natural heirs. Typically, this kind of challenge is backed by medical evidence showing mental impairment.
A challenge of undue influence means the decedent did not make the Trust of free choice, but solely due to the improper influence of another person.
A Trust can be challenged for fraud, such as when the decedent’s signature is forged. Sometimes a Trust that has been previously revoked is mistakenly administered.
Lack of Execution
Each state has its own laws, but as a trust lawyer Phoenix, AZ believes in might tell you, a Trust must generally meet the following elements to be considered valid:
- The Trust is in writing (not verbal)
- The Trust is signed by the Grantor (the person who created the Trust)
- The Trust is signed and stamped by a notary
If a Trust lacks any of the above elements, it becomes susceptible to challenge.
- Administration Challenges
If a creditor comes forward and makes a claim against the estate, it could delay administration of the trust and potentially end up in litigation.
Removal of Trustee
A Trustee can be removed for incapacity, wrongdoing in the administration of the Trust, or breach of fiduciary duty. Removal of a Trustee will always delay administration and is usually ordered by a court.
- Avoid Challenges and Litigation
Use a Lawyer
A trust lawyer Phoenix, AZ has faith in will always tell you to use a lawyer to create an estate plan. Cheaper online methods do exist, but hiring a professional is the best way to ensure that: 1) your assets are truly protected, 2) the trust follows current law, and 3) that your wishes are carried out legally and correctly.
Trusts are created by humans and humans make errors. Your lawyer and their staff will proofread the estate plan, but you should, too. The smallest error in trust language could have huge ramifications, including affecting trust administration and opening the Trust up to challenges.
Laws change often, so the general recommendation is to review and/or update your estate plan every 3-5 years, or at any major life event (marriage, divorce, children, career change, etc.).
How do I make a Living Trust?
If you’ve decided a living trust is the right option for you, you will need to hire an attorney. Cheaper and online methods of creating a living trust do exist, but hiring a professional is the best way to ensure that: 1) your assets are truly protected, 2) the trust follows current law, and 3) that your wishes are carried out legally and correctly.
Each person’s needs and wants are different and can lead to a variety of outcomes when it comes to estate planning. When in doubt, contact an estate planning attorney to talk you through the pros and cons of the different types of trusts.
If you are interested in creating a trust for you and your family, but are unsure what structure would work best for your needs, the experienced estate planning attorney at Kamper Estrada, LLP can help. Contact us today for a free initial consultation.
If you are looking to set up a living trust, call an experienced trust lawyer Phoenix, AZ recommends, call Kamper Estrada, LLP.