Duhaime's Law Dictionary


Living Trust Definition:

A trust from persons to take effect during their living years, to benefit others.

Related Terms: Revocable Trust, Inter Vivos, Testamentary Trust

Distinguished from the more common trust created by will, which only takes effect upon the death of the person creating the trust (known in law as the settlor, donor or grantor). In a living trust, the transfer of property occurs inter vivos; between persons living; many jurists refer to the living trust by the term inter vivos trust.

In 1998, in a case known in the law reports as Limb v Aldridge, Justice Carl Jones of the Court of Civil Appeals of Oklahoma wrote:

"[A] living trust is a trust which takes effect during the life of the settlor, as distinguished from a testamentary trust which is created upon the settlor's death....

" [A] revocable living trust in which the trustor declares himself trustee and also sole beneficiary of the trust income during his life has been widely promoted as a will substitute which purports to avoid the time and expense of probate."

In Weber v Langholz, Justice Vogel of the Court of Appeals of California noted:

"[A] revocable living trust with the settlor as trustee has become a common device for people to manage their own assets during lifetime, avoid having to establish a conservatorship in the event of incapacity, and avoid probate upon death....

[T]he settlors of a revocable living trust (have) a reversionary interest in the subject property...."

Since the living trust is often used to benefit family members, it is also referred to as a family trust. Historically, families would create living trusts at the time of marriage of their children for the prospective benefit of their grandchildren. In the Limb case cited above, the trust was described as follows:

"Virgil R. Limb executed a document creating the Limb Revocable Living Trust in April, 1994, designating himself as trustee (and his daughter as alternate trustee). The two named beneficiaries were his children by a former marriage. Father transferred all of his real and personal property to Trust: his checking account, a small insurance policy, some stocks and bonds, and a car."

Probate and estate taxes can often take a huge bite out of a person's assets at the time of death and so to keep as much money within the family as possible, the tool of a living trust is used.

Living trusts can be revocable by the settlor or irrevocable, with, typically, beneficial tax treatment reserved only for irrevocable living trusts

Generally speaking, at any one moment in time, tax authorities are a step behind the craftiness of living trust makers (i.e. lawyers) but tax treatment of living trusts have, for the most part, caught up in substance if not in detail. If it moves and jingles, the tax man will sooner or later, make an appearance.

Tax treatment can take the form of segregating the trust for tax purposes; it has its own tax return and is taxed separately; or the treatment of the trust as an extension and part of the taxable assets of the beneficiary. In terms of personal income tax, the trick is to transfer within the limits without triggering taxation on the amount so-flowing. This may, for example, take the form of a gift transfer deduction or exemption, which is recorded in a separate tax form.

Another example of a living trust would be elder grand-father, let's call him Rich Grandpa Settlor who wants to gift his grand-daughter, Flighty Ms Beneficairy but wants to control the flow of the asset to her. He sets us a living trust and pours $1-million into it, appointing his eldest son Mr. Mature Trustee as, well, trustee. It is declared to be irrevocable which means even if Flighty Ms Beneficiary becomes an axe-murderess or drug addict, Rich Grandpa Settlor is out the cash in any event. The trust is set to end when the money has been evenly distributed under the administration of Flighty Ms Beneficairy's uncle Mr. Mature Trustee, and Mr. Mature Trustee should be called King Trustee, as he has discretion over much of the trust.

Often, but not always, the trust is named after the beneficiary, as in the "Ms Sally Watson Trust".

Trusts are popular with lawyers because they are so flexible. They allow the transfer of assets from a person to a trust in so many different ways and with an almost unlimited variety of conditions and terms. And so all living trusts are different and adjusted to the needs of the settlor and his/her beneficiary and, to a lessor degree, to the abilities of the trustee. In some cases, the settlor, for the duration of his life anyway, or the trustee(s), may also be the beneficiaries.

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