By Marian B. Phillips

The Purpose of a Living Trust

Without a Living Trust, if you become unable to handle your own affairs, someone has to go to the expense and embarrassment of going to court to have you declared “incompetent” and have themselves – or someone chosen by the judge – declared your “guardian”.

A Living Trust avoids court altogether.   With a Living Trust, if you become unable to care for yourself, either temporarily or permanently, the person whom you’ve designated automatically takes control of your assets, and applies them for your care in the way you’ve described you want to be cared for.

And, to clarify a popular misunderstanding: a Living Trust has no effect on either income taxes or estate taxes.

What is a Living Trust?

A Living Trust is separate legal entity that you create.  You establish it simply by signing a document written for you by a lawyer.  In the document, you name yourself as the Trustee, and you name a person (or two people or an institution) whom you really trust to be the Successor Trustee in the event you’re no longer able to manage your own affairs.

Most important: in the trust document, you lay down the rules of what the Successor Trustee can and cannot do with your assets.  The document should clearly spell out your instructions for how you want to be cared for, and how you would want your money to be managed in the event you become unable to do it yourself and the Successor Trustee has to take over.

In the document, you also define the conditions that would trigger the Successor Trustee taking over.  For example, you can specify that it would happen when one or two named family members agree that you are no longer able to manage your own affairs; or, you may specify a family member or friend and your doctor, together, to make the determination.  The point is that in your Living Trust document you get to define the circumstances under which the Successor Trustee would take over your affairs.  For most people, that point never comes.  But if it does, if you have a Living Trust, you are prepared.

After you’ve signed the trust document, you transfer the ownership of your assets – bank accounts, brokerage accounts, your home, your car, other investments, etc. – to the trust, by having the title on each of those assets changed from your name to the name of the trust.

Think about it: once you’ve made these transfers, the trust – not you – becomes the legal owner of all your assets; which is OK for now, because as long as you are alive and well, you are also the Trustee of your trust, so you continue to have total control over all those assets.  The only difference is that you will now sign your name “as Trustee.”

The 3 Parts of a Living Trust

A Living Trust has three separate parts, describing three separate time periods.

The first part, when you’re alive and well, is easy, because you are the Trustee, so you still control all your assets in the trust.  Nothing’s changed from before you had the Living Trust.   If you want, you can even revoke the trust and transfer all the assets back into your own name.

The second – and most important – part of a Living Trust comes if and when you become temporarily or permanently unable to continue as the Trustee.  For people living alone, this part is a wonderful reason to have a Living Trust: to ensure the continued care of you and your assets in the event you’re disabled.  But this is also the part where people can get into terrible trouble if they’ve chosen the wrong Successor Trustee or if their trust document doesn’t clearly and completely set out their wishes.

Even if you’ve chosen the most trustworthy Successor Trustee, the trust document should contain all the terms and conditions by which you want the Successor Trustee to take care of you and your assets.  You definitely want to have language in your trust document requiring the Successor Trustee to support you in the way you want, spelling out what you consider appropriate for you to continue the lifestyle you expect.

The third part of a Living Trust comes into effect upon your death.  In this part of the trust document you direct how all the trust assets (i.e., your assets) should be distributed after your death.  A Living Trust doesn’t go through the probate process, so it enables a much easier distribution of your assets after your death than with a Will.

So, Should You Set Up A Living Trust? 

Yes, if you have any concern about being taken care of in the event you become unable to handle your affairs.

If you do make a Living Trust, be sure that the terms of the trust document completely represent your wishes.  Remember: that document takes control of your assets away from you and completely governs how you and your assets will be cared for when you’re most in need; so everything you want to say to your Successor Trustee should be spelled out clearly in the trust document.  You should understand and be comfortable with every word in that document – no “legalese” you don’t really understand.

When is a Living Trust not good?  If you select the wrong person to be the Successor Trustee, or if you fail to spell out how you expect the Successor Trustee to manage, you are inviting conflict, at the least, and potentially, a disastrous loss; because at that point that Successor Trustee will have total control of all your assets – as if he or she is the owner of your assets – and at that point you are in no condition to do anything about it if they don’t act the way you want.

The bottom line is that if you select the right Successor Trustee and spell out your wishes and rules for managing your care and your finances, a Living Trust can be a great safety net.

MARIAN B. PHILIPS is a New York attorney specializing in wills, trusts and estates.  Her highly personalized service draws on over 30 years’ experience with clients of varied ages and wealth.  Working alone and in coordination with the client’s accountant and other financial professionals, she meets the client’s full-service estate planning needs in a personal and cost effective way.  Her goal is to make the estate planning and estate settlement processes as easy as possible for the client. She can be reached at marianbphilips@gmail.com, (212) 355-3716.