Living trust

Living trust

A living trust (inter vivos trust) is a trust created during a person's lifetime.

Living Trusts in the United States

In the United States, a living trust refers to a trust that may be revocable by the trust creator or settlor (known by the IRS as the Grantor). Living trusts are often used because they may allow assets to be passed to heirs without going through the process of probate. Avoiding probate will normally save substantial costs (the probate courts, in some states, charge a fee based on a percentage net worth of the deceased), time, and maintain privacy (the probate records are available to the public, while distribution through a trust is private).

Living trusts also can be utilized to plan for unforeseen circumstances such as incapacity or disability.

The grantor/settlor may also serve as a trustee or co-trustee. In the case where two or more co-trustees serve, the trust instrument may provide that either trustee may act alone on behalf of the trust or require both co-trustees to act/sign. The trust instrument may also provide that the other co-trustee shall act as sole trustee if the grantor becomes incompetent and is unable to continue administering the trust.

Despite the advantages, there are also some negative aspects to a living trust in the United States. Beneficiaries do not save on federal estate or state inheritance taxes. Setting up a trust may be expensive, and the expense is immediate, not delayed till after the grantor's death. However, in the long run depending on the circumstances, the expense is usually substantially less to set up a trust and the estate administration is generally much faster when compared to probate.

Living trusts generally do not shelter assets from the U.S. Federal estate tax. A married couple having a trust can, however, effectively double the estate tax exemption amount (the amount of net worth above which an estate tax is levied) by setting up the trust with a formula clause. A formula clause takes advantage of the unlimited spousal deduction allowed under the internal revenue code. When the first married individual dies, the trust pays out to the beneficiaries an amount up to the total unified credit. The amount is set by the formula clause, not strict dollar amounts, because the unified credit increases over time. Without a formula clause, the unified credit could be wasted. The remaining amount of the estate (after the unified credit is exhausted) is paid to the spouse. Thus, when the first spouse dies, no estate tax is owed (just as if the individual died intestate). However, when the second spouse dies, the distribution to the trust beneficiaries is subject to that decedent's unified credit. The rest is subject to estate tax. If the married couple had died intestate, the first decedent's unified credit is lost because everything is transferred to the spouse upon his/her death. A formula clause is necessary only if the value of the estate is larger than the amount of the unified credit.

For a living trust, the grantor/settlor will often retain some level of relevance to the trust, usually by appointing himself as the trustee and/or as the protector under the trust instrument (in jurisdictions where protectors are recognised). Living trusts also, in practical terms, tend to be driven to large extent by tax considerations. If a living trust fails, the property will usually be held for the grantor/settlor on resulting trusts, which in some notable cases, has had catastrophic tax consequences. A living trust is not under the control and supervision of the probate court, and property held by such a trust is not part of a descendent's probated estate.

The Parties To The Trust

Grantor/Settlor: The person who sets up the trust; also called the settlor, trustor, or trustmaker.Trustee: This is the person who will manage the trust assets. This also may be the settlor in a Revocable Living Trust, since the settlor wants to manage his or her own property. Some revocable living trusts "self settled trusts" (that is, the grantor is also a beneficiary of the trust).Successor Trustee: Where the Grantor is a Trustee, the Successor Trustee is the person who will manage the trust assets when the Grantor dies, or in the event the Grantor becomes incapacitated. Upon the Grantor’s death, the Successor Trustee will immediately have the same powers that the Grantor had as Trustee to buy, sell, borrow, or transfer the assets inside the trust. Also, the Successor Trustee has the right to distribute the trust’s assets according to the Grantor’s instructions in the trust instrument. The Successor Trustee does not have the legal right to change the trust. The trust becomes irrevocable upon the Grantor’s death. The Successor Trustee has the right to manage the assets in the estate, but must do so for the benefit of the remainder beneficiaries. At the Grantor’s death, the Successor Trustee automatically takes over without court order, pays any debts, expenses and taxes directed to be paid by the terms of the written trust document, and then distributes the property to the trust beneficiaries. Where the trust is scheduled to terminate on the Grantor’s death, and the trust is merely a means of avoiding probate, the death beneficiary should ordinarily be named Successor Trustee.Beneficiaries: The people who will receive the benefit of the trust’s assets are called beneficiaries. Sometimes, the grantor is the original beneficiary. Those who take after the grantor's death are “remainder beneficiaries."

Establishing a living trust

To establish a living trust, an individual transfers title of his assets from himself as grantor, to a trustee of the trust (often the trustee and grantor are the same person), to administer for the benefit of himself and at least one other person. The trust may also name the remainder beneficiaries who will take over after the grantor dies. The beneficiaries get nothing until that person dies.

Depending on the size of the trust, it may be advisable to use a corporate trustee such as a bank. A substantial advantage of this approach is that a corporate trustee can act in perpetuity, whereas an individual cannot. Corporate trustees must provide accurate and detailed records of all transactions that take place in the trust, for however long the trust exists. Those records become what is known as an "accounting" of the trust, which may be required to be provided to a court or remainder beneficiaries. Corporate trustees also are required to manage the investments held in the trust. Laws have been updated in most states to allow a corporate trustee to act in a "directed capacity," meaning that the trustee is required to have oversight of the trust investments, but not the day-to-day management of them.

Individual trusts. To establish a basic living trust, the Grantor signs a document called a declaration of trust, which is similar to a Last Will and Testament. In the document, the Grantor typically names himself or herself as trustee, and transfers assets to that trust (i.e., the transfer is actually made from the Grantor to himself, as Trustee). Because the Grantor is named as the trustee, he or she maintains full control over the assets.

After the Grantor--or the Grantor and Grantor's spouse (in the case of a joint trust)--dies, the person identified as successor trustee in the trust document generally assumes that role. The successor trustee transfers ownership of the assets in the trust to the beneficiaries named in the trust document. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the living trust terminates.

South Africa

In South Africa, there are basically three types of trusts. These are living trusts (in South Africa called inter vivos trusts), testamentary trusts and bewind trusts.

Testamentary trusts are created at the winding up of a deceased estate following a specific stipulation in the deceased person's will that a trust must be set up. Testamentary trusts are usually created to hold assets on behalf of minor children, since minor children can not in terms of South African law inherit anything (in the absence of a trust, assets from the deceased estate left to minor children are sold, and the money is paid to them when they reach adulthood). Bewind trusts are created as trading vehicles providing trustees with limited liability and certain tax advantages.

There are two types of living trusts in South Africa, namely vested trusts and discretionary trusts. In vested trusts, the benefits of the beneficiaries are set out in the trust deed, whereas in discretionary trusts the trustees have full discretion at all times about how much each beneficiary is to benefit.

The parties to the trust

There are three parties in a living trust, namely the founder, the trustees and the beneficiaries. The trust is managed by the trustees for the benefit of the beneficiaries. The beneficiaries can be any legal persons, including living people, other trusts, and registered businesses. Trustees may also be beneficiaries.

Establishing a living trust

The trust is created by drafting a trust deed (usually in co-operation with an attorney specialising in trust law) and registering the trust with the local High Court. The trust becomes effective as soon as it is registered.

Asset protection

Until recently, there were tax advantages to living trusts in South Africa, although most of these advantages have fallen away with new legislation. The remaining advantage of a living trust is the protection of assets from creditors. In an ideal situation, since assets held by the trust aren't owned by the trustees or the beneficiaries, the creditors of trustees or beneficiaries can have no claim against the trust (there are exceptions). A common scenario of using living trusts for asset protection is a husband and wife acting as trustees along with a third unrelated trustee. The trust is granted a loan equal to the value of their assets, then the trust buys their assets using the loan, and finally the trust pays off the loan over time. When any of trustees die, the trust and any assets owned by it, remain unaffected.

Assets transferred into a living trust remain at risk from external creditors for 6 months if the previous owner of the assets is solvent at the time of transfer, or 24 months if he/she is insolvent at the time of transfer. After 24 months, creditors have no claim against assets in the trust, although they can attempt to attach the loan account, thereby forcing the trust to sell its assets.

Assets can be transferred into the living trust by selling it to the trust (through a loan granted to the trust) or donating cash to it (any person can donate R30 000 per year tax free; 20% donations tax applies to further donations within the year).

Tax considerations

In terms of South African tax law, living trusts are considered tax payers. Two types of tax apply to living trusts, namely income tax and capital gains tax (CGT). A trust pays income tax at a flat rate of 40% (individuals pay according to income scales, usually less than 20%). The trust's income can, however, be taxed in the hands of either the trust or the beneficiary. A trust pays CGT at the rate of 20% (individuals pay 10%). Trusts do not pay deceased estate tax (although trusts may be required to pay back outstanding loans to a deceased estate, in which the loan amounts are taxable with deceased estate tax).


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