Updated: January 25, 2024
A living trust is created while you’re alive. They are sometimes called family trusts.
The first decision to make is whether or not you need a living trust at this point in your life or ever.
Considerations When You Are Choosing Which Type of Living Trust to Create
A family trust is not a specific type of trust but is any trust you create that names your family members by blood, marriage, or law (in the case of adoption) as the beneficiaries — not just your spouse like A-B or ABC Trusts. The name can be confusing because some use the term almost interchangeably with Living Trust. However a testamentary trust is also a Family Trust if it only designates family members as beneficiaries.
When a living trust is irrevocable it means that after the trust agreement has been formed, signed, and funded you will not be able to revoke (end) the trust or alter any of the existing conditions in the trust. A revocable trust becomes irrevocable when you die and could become irrevocable if you are alive and unable to manage it and haven’t added a condition that gives the new trustee the power to do so.
You are not allowed to be a trustee of an irrevocable living trust and give up rights and control of your property and other assets in it.
You can set up an irrevocable living trust right from the beginning. Aside from asset protection and lowering of estate taxes, you may have personal reasons to opt for this such as an illness that may eventually impair your judgment.
You can add assets but unlike a revocable living trust you are not allowed to remove assets, take property back after you’ve put it in, or remove any beneficiaries if circumstances change.
Since you are not legally considered the owner, your assets will be protected from creditors before and after you die.
An irrevocable living trust has its own taxpayer identification number, unlike a revocable trust where the trust and its trust maker share the same Social Security number.
Setting up the trust to defraud creditors can result in a court declaring the transfer of assets to a trust to be fraudulent and exposure of the trust assets to liability. You could face heavy legal penalties.
There are ways to make changes but they usually need to be part of the initial trust agreement and signed by the trustees and all beneficiaries, including any contingent beneficiaries.
There are options to account for any unforeseen problems with an irrevocable trust that impede its original intent.
Although most irrevocable trusts can protect your assets from creditors, lawsuits, or any judgments against your estate, an asset protection trust (APT) or self-settled asset protection trust is more effective since it is set up specifically to do this.
You may want to do this if you:
They are expensive and complicated to create, but if done properly the trust may deter potential creditors or plaintiffs from pursuing any action. Make sure you consult a professional skilled in their creation.
When creating a self-settled asset protection trust there are five things you and your attorney will need to consider.
There are two basic types of APTs depending on where the trust is located.
A credit shelter trust is not a living trust or even a single type of trust but trust options that will provide for your surviving spouse while arranging to have your descendants or adopted children inherit part of your estate while sheltering them from creditors, lawsuits, and estate taxes up to a certain limit.
A bypass trust transfers ownership directly to your children while most marital trusts will split into an irrevocable bypass trust for your children and a revocable trust for your surviving spouse.
Bypass Trusts
Bypass trusts, such as a Qualified Terminable Interest Property Trust, are irrevocable trusts that benefit your surviving spouse by providing income from the trust’s assets and ensure that your children receive their inheritance.
This is more commonly done with spouses who are not a parent of your children, who would probably not be the trustee.
Marital Trusts
There are a number of choices for couples covered in detail in the Trusts for Married Couples section.
Because two trusts are formed at your death and each could contain up to the $13,610,000 estate tax limit, twice the estate tax limit would be tax free.
A settlement from a life insurance policy can be subject to estate taxes if it pushes your assets over the federal and/or state maximum. One way to avoid this is to make sure you name a beneficiary for the policy who will receive the settlement after your death. You can make the beneficiary the owner of the policy, but there are a number of potential issues associated with that such as them making changes you won’t want or dying before you.
Another way is to create an insurance trust. An insurance trust is a trust set up to own or hold title to your life insurance policy. It can be done with term or permanent life insurance. This works with both individual and second-to-die life insurance policies which insure two lives, usually spouses, and only pay a death benefit after the second spouse dies.
If you already have a life insurance policy, you can transfer the policy to the trust after it’s been formed.
If you do not have a life insurance policy, you can create the trust and use it to purchase the policy directly.
In addition to the policy, you will need to fund the trust with enough money to pay the premiums.
Once your life insurance policy is in the trust, you will either choose a beneficiary or consider changing them. It is best if you name the trust itself as the beneficiary. This is separate from naming a beneficiary of the trust.
Insurance trusts have additional benefits.
You will usually create your trust as an Irrevocable Life Insurance Trust (ILIT).
Although not recommended, you may opt to create your insurance trust as a revocable trust with you as the trustee.
A Crummey trust, Crummey provisions, or Crummey power, are ways to give gifts that qualify for gift-tax exclusion and still control how the gift is used, which can’t be done with a direct gift. This can be especially useful for minor children as an alternative to a Custodial Account (a brokerage or savings account managed by an adult conservator for the children until they reach the age of maturity) since a trust is more flexible and can control when and how beneficiaries can use the assets.
These gifts are in the form of additions to an irrevocable trust.
There are specific actions that need to be taken to make contributions to a trust eligible for gift-tax exclusion.
A Crummey trust can include provisions that make the gift only accessible to your beneficiary once they have reached a certain age and can also be used to fund college expenses when the beneficiary starts college.
A qualified personal residence trust (QPRT) allows you as a homeowner to reduce estate taxes by removing the value of your primary and/or secondary house along with the land and all future appreciation from your assets or joint assets with your spouse. A QPRT is most useful if you have a residence that you would like to keep in the family.
You can create two QPRTs if you want to protect both your primary and secondary residence, one for each. Initially, the residence will be in the trust. Once the trust ends your beneficiaries will have ownership and the house stays in your family, although you cannot buy it back.
The process involves creating an irrevocable trust with your children as beneficiaries and funding it by transferring ownership of your property to the trust.
Terms of the trust
You (and your spouse) have the right to live in the house rent free for the “retained income period,” i.e. the specified period of time chosen when the trust was created. This phase needs to be long enough for a financial benefit and short enough to reduce your risk of dying during it.
The house then goes to the designated beneficiaries or a trust in their name. As before, this is usually done by making a new deed with the names of your beneficiaries or their trust. You are now their tenant. This is called the “remainder interest” phase. You will begin to pay fair market rent if you stay in the house full-time or when you stay there at times. The rent payments:
While this sounds like a good financial plan, there are many factors to consider.
A Miller Trust has a single purpose: to allow Medicaid recipients with a gross income over your state’s Medicaid limit to be eligible for long-term Nursing Home Medicaid, Home and Community Based Services (HCBS), or Aged, Blind and Disabled Medicaid care benefits when you would otherwise be unable to afford them.
Miller Trusts are not necessary in those states that allow Medicare recipients to qualify for these benefits by spending down income over the state’s limit on medically related expenses.
An alternative is a Pooled Income Trust. This is a type of charity trust created by non-profit organizations for disabled individuals, mainly disabled minors, that allow them to qualify for Medicaid.
Even if you qualify by income, you may have too many resources or assets to qualify for Medicaid. In this case, all states allow you to qualify by putting your assets into a first-party special needs trust
Twenty-five states are “categorically needy” or “income cap” states where Miller Trusts can be used to qualify for these benefits. Income cap states include Alabama, Alaska, Arizona, Arkansas, Colorado, Delaware, Florida, Georgia, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Texas, and Wyoming. Arkansas, Florida, Georgia, Iowa, Kentucky, and New Jersey are also spend states.
The way a Miller Trust works is that any of your income put into the trust is not counted as income.
In order to establish a Miller Trust a trust document is drawn up and a bank account for the trust must be opened.
Each state that allows Miller Trusts has different rules. These rules may include:
There are specific expenses that the trust funds can be used to pay.
Income and interest earned by the trust, if any, can accumulate and will not be counted as a resource.
Aside from the restricted use of the funds, your state must be named as the beneficiary of the trust. If there are any remaining funds after your death, they will go to your state’s Medicaid program.
Thirty-two states are “medically needy” or “spend down” states where Miller Trusts are not needed to qualify for these benefits if you are unable to afford them. Spend down states include Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Pennsylvania, Rhode Island, Utah, Vermont, Virginia, Washington, West Virginia and Wisconsin. The District of Columbia also allows spend down.
Medicaid recipients who are over the income plus assets limit can qualify for these services by spending all of these excess assets on medical care expenses, health insurance premiums, and and other approved items.
Assets counted towards the asset limit are cash and liquid assets easily converted to cash, including:
Assets not counted towards the asset limit include:
Allowable Medicaid spend down items:
Each state may have their own name for the program and income limits. Medically needy states include Arkansas, California, Connecticut, District of Columbia, Florida, Georgia, Hawaii, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Pennsylvania, Rhode Island, Tennessee and Texas (children and pregnant women), Utah, Vermont, Virginia, Washington, West Virginia, and Wisconsin.
In Arkansas, Florida, Georgia, Iowa, Kentucky, and New Jersey this option is only available to those who are vision impaired, disabled, or over 64 years old (i.e. eligible for Medicare).
Spent Down Calculator for determining Eligibility for Medicaid Long Term Care
Charitable Remainder Trusts and Charitable Lead Trusts are also irrevocable trusts, but are covered in another section.
When a living trust is revocable it simply means that the trust can be revised, closed, or have assets added or taken from the trust at any time. If the trust is closed (revoked), your assets are transferred back to you.
Unlike an irrevocable trust, a revocable living trust doesn’t have its own taxpayer identification number, it has the same Social Security number as you.
There are two or three phases to a revocable trust.
A Totten Trust is a revocable living trust that is a type of payable-on-death account. You can easily set one up without a formal written document. However, it can be established as a formal trust by naming a beneficiary on the title document for the account using language such as “In Trust For,” “Payable on Death To” or “As Trustee For.” See the Payable on Death section for more detail.
Since your trust is a dynamic system, it is important to periodically review it and make decisions about the trust based on any changes in your life. As long as you are capable, you are free to alter or close (revoke) the trust whenever you want.
There will be many times when you will need to alter the trust. If you have a joint trust, both of you must agree with the changes. By not updating your trust, some of your assets may end up with an ex-spouse or in probate court when they are not accounted for. You can either amend the trust or completely redo it. This cannot be done by marking the changes on the original document, it must be done with a new document.
You will need to alter the trust:
If the trust document was drafted properly the ability to add more property and assets should be part of the original trust language, so you will not need a separate document to amend your trust. Amending refers to minor changes in the trust.
These changes could include adding a beneficiary due to birth or adoption, adding or removing specific bequests, changing who will serve as successor trustee, or updating a beneficiary’s or the successor trustee’s legal name due to marriage or divorce.
If you need an official document or have minor changes to your trust, use these steps — these are general recommendations because state laws vary on adding amendments to a trust.
Restating your trust involves making a document stating that you are not revoking the original trust agreement but are restating or redoing it with some amendments. Restating your trust is preferable if you make anything more than simple changes. It might be better to redo the entire trust if you:
An Amendment and Restatement of Trust is a document that will completely replace and supersede all of the provisions of the original trust. This avoids the confusion that would happen if multiple amendments were added. Title the document, such as “Restatement of the [your name] Revocable Living Trust” dated [original creation date].
There are two options. A document that:
The restatement does not nullify the original trust, but reworks it in a way that allows all of your assets and property to remain in the trust and avoids changing ownership on titles and deeds to a new trust.
You will likely want ran estate planner to help you.
Trust Restatement Forms can be found at LawDepot, Pennyborn, RocketLawyer, and US Legal Forms.
You can cancel your revocable trust at any time. If it is a joint trust, either of you can decide to revoke the trust. There are a number of reasons you may choose to do this, such as:
If you decide to terminate the trust for any reason, you must first remove all the assets from the trust.
You then need to put your intent to revoke it in writing using the appropriate document, such as an official document of dissolution.
After closing the trust, notify the beneficiaries and change the owner on any deed or title such as real estate, bank accounts, securities, business interests, safety deposit boxes, vehicles, copyrights, patents, and other personal property.
If you transferred everything back into your name, you need a new plan to have these items pass to the beneficiaries such as a will. You can also create another trust and change the ownership to that trust. This will also require changing the owner on any deed or title of assets transferred into the new trust.
You may need to file a final tax return for the trust if it earned more than $600 in income.
Revocation of Living Trust Forms can be found at Free Printable Legal Forms, NOLO, Rocket Lawyer, or pdfFiller.
Income trusts are an estate planning strategy that transfers assets to family members in a way that can reduce gift or capital gains taxes while providing you an income from the growth of the trust while it exists.
There are three types depending on the duration of the trust and whether or not they are revocable.
A private annuity trust can be used for asset protection (estate freeze). It is an agreement in which you (the settlor) transfer/sell property or assets to another person (the trustee) in the form of a trust in return for regular payments to you. This is usually an adult child or other relative, but could be a coworker you want to leave your business to. This is different from other types of annuities involving financial institutions that will provide income during retirement for turning your assets over to them.
A private annuity trust will exist as long as you are alive. You can put your entire estate into the trust, except any assets funded with pre-tax dollars, such as traditional IRAs and 401(k)s. You will receive a fixed yearly income based on the probable earnings of the trust until your death. The trust will then be transferred to your beneficiaries.
An annuity trust is best reserved for assets that will produce capital gains and/or will have significant appreciation over time to allow you to have a good income.
The major goal of the private annuity trust is to defer capital gains, but it can reduce gift taxes and estate taxes for your estate. Although you will need to pay a capital gains tax at the time of transfer to the trust, the annuity will have the effect of decreasing further capital gains taxes since the assets, including any growth, are no longer part of your taxable estate.
The value of the asset is the fair market value (FMV) assessed at the time the annuity trust is created, so you will need an assessor. Assessor’s and other fees, such as legal or accountant fees, can make setting up an annuity expensive.
Because the private annuity essentially makes the transfer a sale rather than a gift, the transfer is not subject to a gift tax. However, this is not true if the value of the annuity is less than the FMV when the difference is considered a gift to the beneficiary/obligor.
After transfer of assets, the obligor agrees to make payments to you based on the terms of the annuity trust to provide you with an income. Payments will be subject to income tax.
If the annuity trust is transferred to your beneficiaries or a trust in their name, there will be no estate tax or capital gains tax if the annuity increased in value. Your beneficiaries would only pay capital gains tax if they sell the assets and there were capital gains that accrued after your death.
A Grantor Trust is a form of estate freeze that allows you to receive income from the assets and interest earned by the trust for the life of the trust while fixing the value of the assets at what they were worth when the trust was formed.
The trust is a separate legal entity where you (the grantor), not your estate, are the owner of the assets and property for income and estate tax purposes while the trust exists. You pay income taxes on the funds received. This is an advantage since individual income tax rates are lower than the rates for trusts.
You could also use Grantor Trusts to leave a significant amount of assets in the trust to transfer to your beneficiaries after the trust expires without affecting your lifetime gift exclusion or being subject to estate tax.
Unlike a private annuity trust, grantor trusts only exist for a limited time, typically 2-10 years. The choice of the trust duration needs to balance the fact that with a longer investment there will be more growth and the risk of dying while the trust exists. If the goal is to have the remainder of the trust go to your beneficiaries while you are alive, it is important to make sure the trust expires before you die. You would not want to put your entire estate into the trust, since it would leave you with nothing when it expires.
Grantor trusts are most effective when funded with assets that may appreciate significantly over time, such as shares of a family business, pre-IPO stocks, or other assets that can be transferred to high-yield investments. Grantor trusts are less effective if the assets depreciate during the duration of the trust.
You will want to put enough assets in the trust that the revenue generated is enough to live off of, but not enough to result in significant gains in the trust that you cannot take advantage of. This would make your family responsible for any capital gains that occurred during the duration of the trust and have to pay capital gains tax on any assets sold.
There are consequences if you die before the trust expires. The assets would no longer have grantor status and will become part of your taxable estate and be subject to estate tax. This, plus any professional fees to create and maintain the trust, will reduce the amount of the estate your beneficiaries inherit after your death. Since you may not have planned for this, these assets would probably require an intestate settlement to distribute the assets to your beneficiaries.
Grantor Trusts can be revocable or irrevocable. There are significant differences between them.
This is the only form of grantor trust that is revocable. As a revocable trust you will be the owner/trustee and manage the assets of the trust, although you should name a successor trustee if you become unable to do this. You will be subject to 26 U.S. IRS Codes § 67-677 and §2035-2042.
When the trust expires any assets remaining either go to the beneficiaries tax-free or go into another trust to benefit them.
A grantor trust can become irrevocable if you die or give up control to another trustee.
Under certain circumstances the Internal Revenue Service can consider any trust a grantor trust, such as if you have a reversionary interest greater than 5% of trust assets at the time the transfer of assets to the trust is made.
A grantor trust can be irrevocable. Because the trusts are irrevocable you cannot be the owner/trustee, you can no longer control or reclaim the assets, the assets are protected from creditors, and assets are not subject to estate tax while you are alive or at transfer.
You will still pay income taxes under your own social security number, but the trust will also file a tax return under its own tax identification number (TIN) and pay any taxes associated with income/gains. The Intentionally Defective Grantor Trust is an exception; you pay both the income tax and taxes on any income/gain of the trust.
There are four forms of irrevocable grantor trusts, each providing income in different ways.
Grantor Retained Annuity Trust (GRAT)
A GRAT provides a fixed annual income in one of two ways.
You can opt for a “zeroed-out GRAT,” where you choose an annuity payment that will most likely pay out the entire value of the trust assets over the term of the trust.
You can either establish a single, longer-term GRAT or a series of shorter-term GRATs, often referred to as “rolling GRATs.”
A provision can be added that once your GRAT has been funded that if the assets in the GRAT are not generating enough income they may be exchanged for different assets that may perform better.
Grantor Retained Unitrust (GRUT)
A GRUT provides you with an income based on a fixed percentage of trust assets each year. The amount will vary based on the annual evaluation of the trust’s worth.
You can make additional gifts to the trust beyond the initial one.
Grantor Retained Income Trust (GRIT)
A GRIT provides you with an income based on the net income from the GRIT.
A GRIT requires beneficiaries to be nieces, nephews, or other more distant relatives, not your spouse, lineal descendants or siblings of you or your spouse, or their spouses.
Intentionally Defective Grantor Trust (IDGT)
Unlike the others, the IDGT has a purposeful flaw that allows you to have controlling interest in the assets and to continue to pay income taxes on the trusts income/gains despite the fact that they are not part of your estate.
An IDGT can provide income based on either:
It is the most complex and expensive grantor trust to set up and maintain. Other aspects specific to an IDGT include:
In all four forms you have the option of trying to use up the assets or leave some for your beneficiaries (must be family). If your plan is to leave assets for your family, you choose a percentage based on the amount you want to transfer to them when the trust expires.
A Qualified Personal Residence Trust (described above) is also a type of irrevocable grantor trust that only contains your primary or secondary residence. Instead of a steady income, the trust allows you to live in or use the residence rent free for the duration of the trust. Like the assets in the other grantor trusts, the residence goes to your beneficiaries after the trust expires and returns to your estate if you die before then.
After doing the above steps you should have a good idea of how complex your trust will be and whether you want to try and set up your own trust or have it done professionally.
To create a revocable living trust you, known as the grantor, settlor or trustor, need to have a viable document called a Trust Agreement, Declaration of Trust, Deed of Trust, or Trust Deed. You could begin by filling out a living trust form appropriate for your state, using appropriate software, or going to a professional estate planner. Consult an attorney or other estate planner if you are not completely sure you can do it yourself or have them evaluate the document after your are finished.
A living trust is not only a document, but a dynamic financial investment that must be actively managed. It can be a laborious undertaking and there are many details to know to make your trust valid.
In each case the ownership should reflect your choice of either the trust itself or the trustee on behalf of the trust.
To have a viable and effective living trust you should transfer and continue to add most of your property and other assets into it before you die. This is crucial since most courts can decide to dissolve a trust that is worth less than the amount of money needed to distribute the trust property. States may even have a law that dissolves a trust if it does not have the minimum value in funds or property specified in that state law.
After being retitled your savings, checking, money market accounts, brokerage accounts, and nonqualified annuities can be transferred directly to your trust.
After being reissues your stock and bond certificates can also be transferred directly to your trust.
Real estate such as your home can be transferred using a quitclaim deed. An alternative is a warranty deed which ensures you have good title by pledging or warranting that you own the property free and clear of any outstanding liens, mortgages, or other encumbrances against it. When you transfer the deed, it may make it easier for your trust beneficiaries to sell the home at a later date.
Other items of personal property (such as your jewelry, antiques, or furniture) can be transferred with an assignment of ownership document and listed on a property schedule.
You can even make your trust the recipient of any payments received on loans you have made to others. This would be with an assignment of rights document.
Most people will not need to deal with these, but other assets that can be transferred into the trust include: business interests, royalties, copyrights, patents, and trademarks, gas, oil, and mineral rights, and accounts receivable.
Any assets not included in the trust can be transferred into the trust at the time of death using a simple pour-over will.
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