The environmentalist in me wants to use as an example of a living trust, Earth; given to us by a Settlor of Divine origin; for which we are the trustees, and the beneficiaries are our descendants.

Ahh! With that emotional statement off my chest, I will say the second coolest thing about living trusts; it has a cool Latin name inter vivos trust (see, also, the Legal Definition of a Living Trust). It also sometimes goes by the name of family trust, which is more descriptive of its common, but not only purpose.

Living trusts, as a species of trusts, have been around since the 1600s, a creature invented by English solicitors and blessed by the Chancery Courts of old England, who applied a species of law called Equity. The inter vivos trust, the solicitors successfully proposed, excises specific property from a living person and sets it separate and apart, to be managed as a separate, financial entity (the separate entity aspect of a living trust is not unlike the independent legal being given to a corporation, a distinct yet similar creation of the law which was developing at the same time in England).

Living trusts are nowadays ... everywhere. In fact, every single trust in the whole wide world is a living trust except for those that are created by will; that take effect only upon the death of the settlor, as opposed to during her or his lifetime.

Law 101: there are only two kinds of trusts: testamentary trusts and living trusts.

Living trusts are Amazing Tools.

Some of the uses of living trusts:

Living trustCARE: A living trust avoids giving the entirety of an asset to a child in one fell swoop. The trust can control the delivery of the capital and the income of an invested sum of money through the trust, to a child, so that it occurs over a long, long period of time, and even down to future generations, long after the death of the Settlor. Parents may wish to buy a secondary, revenue residence, such as an apartment building, and put it into a living trust to benefit one or all of their children. Such a trust is also very helpful for providing income to elders, mentally-challenged or physically disabled individuals, and it can be set up for a specific charitable purpose.

REDUCE TAXATION: Rather than the all-at-one-time transfer of an asset at the time of death (such as in a will), a living trusts can arrange for the distribution of assets in a stream, over many, many years. This reduces exposure to taxation if it does not eliminate it entirely. Another taxation-related strategy is to move the assets into a living trust situated in a tax-free or tax-friendly jurisdiction. There are still some places in the world where little or no tax is imposed upon the investment income accrued by a living trust.

AVOID PROBATE: Assets that have already been given to the trust do not form part of a decedent's estate and are therefore not subject to probate or estate taxes. The process of probate and administering a will is fraught with lawyer and executor expenses, probate costs and fees, accountant fees to prepare the death return, as well as the potential for litigation and the freeze over all assets until the executor can finish the inventory (see Legal Definition of Executor's Year). All this is avoided with a living trust.

AVOID PUBLICITY: a will is a very public document once probate is engaged (see, for example, Famous Wills). To avoid this airing of the family laundry in public, a living will is utilized as there are usually little if any publicity requirements associated with them and privacy can be assured.

TEMPORARY ASSET MANAGEMENT: Politicians are usually under strict conflict of interest guidelines often requiring them to temporarily turn their investment portfolio over to a trustee in a blind trust. This is a form of a living trust.

AVOIDING LEGAL THINGS: This applies to taxation as well. Tax avoidance is legal; tax evasion is not. But a living trust used to legally transfer an asset away from exposure to some form of legal liability. For example, the living trust may assist in avoiding the reach of wills variation statutes (aka dependents' relief legislation).

Revocable/Irrevocable?

When he or she creates the living trust, the settlor must decide whether it is revocable or irrevocable. If it irrevocable, the umbilical cord is severed and the trust on its own. If it is revocable, the assets may one day be returned to the settlor. Lawyers describe this status is referring to the settlor as being a remainder right, the settlor called a remainderman or having a reversionary interest. While an attractive option, the revocable living trust is often looked at by tax authorities with suspicion and accordingly exempted from favorable tax treatment otherwise afforded to irrevocable living trust.

Knitting the Living Trust

There are some magic words required to create a trust. All trust agreements should be in writing (called a constitution), the property being transferred must be ascertainable; a trustee should be appointed; and the lifespan of the trust indicated.

A basic living trust agreement might read something like this:

Irrevocable Rich & Wise Duhaime.org Living Trust

  1. I, Rich and Wise Internet User, wish now to create a trust for the benefit of Duhaime.org and I have now transferred to Lloyd Duhaime, my trustee of this living trust, the sum of $1-million, and I may later transfer more money or assets to my trustee to hold upon this trust.
  2. Lloyd Duhaime agrees to accept and hold and deal with the trust property honestly and in keeping with the common law of trusts as well as the Trustee Act of the Canadian Province of British Columbia, as it may from time to time be amended, services for which he may receive remuneration from the trust.
  3. The trust is to be paid out to Duhaime.org on a unitrust basis such that it is completely paid out and expires in 2031, and upon the last payment, the trust shall end.

{Signature of Rich and Wise Internet User with $1-million cheque attached payable to the Irrevocable Rich & Wise Duhaime.org Living Trust}

Captain Lawyer

Of course, the above trust agreement is just a vulgar, quick and dirty example ... well, not that vulgar if you're so inclined.

But if you really are creating a living trust, each and every part of your document should be drafted by or at least reviewed by a lawyer; not just because you would then pay that lawyer money (although that is important!), but because only a lawyer not restricted to an Internet page in explaining basic law, can take the relevant information from the clients and convert it into a multipage, beautiful living document: your very own living trust. The lawyer will also advise you as to when and how to transfer the money or the assets into the living trust (usually by creating a separate bank account which is identified by the name of the trust) and making sure that the client has the advice of an accountant so that the proper relationships are established between the living trust and the tax authority. Remember that the tax man is always watching as would be those jealous of the living trust beneficiaries ready to pounce on any slip up in the Constitution of the living trust.

Living trust RogerMany courthouses have libraries in which forms are available to show the basic structure of a living trust. Beware of these forms if you do not have the knowledge to use them, and especially because they are notoriously full of legalese and impossible for the layperson to understand. If you do hire a lawyer, insist upon a plain language Constitution for your living trust.

Other living trust things for which there is great flexibility and which only a lawyer can advise on depending upon the particular circumstances of the clients:

  • Who is the trustee and should there be an alternate? If the trust is to have a long life, what would the process be for appointing new trustees if the trust outlasts the first and alternate trustee? How can they resign?
  • How much, and in what specific areas will be trustee(s) have discretion?
  • Who are the beneficiaries? Perhaps the settlor is one of the beneficiaries? What if a beneficiary dies before the living trust has run its course? ?It is not uncommon that the trustee would also be one of the beneficiaries but notice that if the living trust is a revocable and the only trustee and only beneficiary is one of the same person, there is a complete unity of property interests. This may allow that person to apply to a court of law to wind up the trust and disperse the funds then and there without having to wait and receive only interim payments while the living trust runs its course. Again, the pitfalls and labyrinths of living trusts are best navigated with the assistance of Captain Lawyer.
  • Is the trust revocable or irrevocable? Under all the circumstances of the client, what are the consequences of making a living trust revocable?
  • Are there other options available beside the living trust which may accomplish what the client wants to accomplish without the complexities and the potentially permanent transfer of assets to a living trust? A power of attorney may serve just as well to protect the assets of, for example, a disabled person.
  • Once the trust is created and investment income starts to flow into it, how does the trustee calculate the payments to beneficiaries in terms of timing and amount(s)?
  • Should the living trust simply refer to the trustee legislation in the local law books or are generic list of duties and powers of a trustee sufficient? Perhaps the settlor expects the trustee to work for free? Perhaps the settlor wants the trustee to invest in specified areas such as environmentally-friendly investments?
  • When does the trust end? It is important to provide a mechanism for determining the end of a trust or the entire trust may come crashing down if anybody ever applied to court that it be given a Christian burial relying on the rule against perpetuities.
  • What are the powers of a beneficiary? Can they demand an accounting from the trustee?

CONCLUSION

Perhaps it is only fitting, given the extraordinary uses of the living trust, aka the inter vivos trust, that the learning curve would be so high, the stakes so high, the law so complex.

But here's a secret well known by the rich: living trusts, like every other area of the law, requires just a bit more learning, a bit more reading than most in our instant gratification society can tolerate but in many, many areas, it is the command and clever use of the living trust that can be the only true key to wealth acquisition and management.

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