Wills and living trusts both direct the distribution of your assets to beneficiaries after you die. However, a revocable living trust offers added flexibility and functionality, including incapacity planning.
Like other types of trusts, there are three roles under a revocable living trust:
- The person who creates the trust, called the grantor, trustmaker, or trustor
- The person who manages the trust and the accounts and property it owns, known as the trustee
- The person who receives money and property from the trust, called the beneficiary
Before setting up a revocable living trust, understand your roles as grantor and trustee. These complex legal documents require careful drafting with help from an estate planning attorney.
Two Phases of a Living Trust: Today and Tomorrow. A living trust is a powerful tool that affects your life today and throughout certain events into the future, such as incapacity or death.
The Living Trust While You Are Alive. As the grantor of a living trust, you must transfer your assets into the trust’s name. As trustee, you retain control and can manage, alter, amend, or revoke the trust while mentally capable, including adjusting assets, beneficiaries, and inheritance rules
Because you retain control over your trust’s accounts and property, there are limitations:
- You cannot shield assets from creditors.
- You must report trust income on your personal tax return.
- You must sign as the trustee, not individually, for trust-related business.
The Living Trust After You Die (or Become Incapacitated). This brings us to the next phase of a revocable trust: the time after your death or incapacitation. When you pass away or become incapacitated, a successor trustee takes over according to your instructions. The successor trustee may manage the trust’s assets for beneficiaries, either for an extended period or until the trust is terminated and assets are distributed. During incapacity, you remain a beneficiary but cannot be a trustee. It is advisable to name a backup successor trustee in case the original cannot serve.
Get an Estate Plan That Fits Your Needs and Goals. Creating a living trust makes you a wearer of many hats. You are the creator of the trust, the initial trustee, and the beneficiary. Each role comes with unique powers and duties that apply now and upon certain future events, such as your incapacity or death.