Legal Definitions - living trust

A living trust, also known as a revocable trust, is a legal arrangement created during a person's lifetime to hold and manage their assets. The key characteristic of a living trust is that the person who creates it (called the "settlor" or "grantor") retains the power to change, amend, or completely terminate the trust at any time, as long as they are mentally competent. This flexibility allows the settlor to add or remove assets, change beneficiaries, or modify the terms of the trust as their life circumstances or wishes evolve.

Upon the settlor's death, the assets held in the living trust are typically distributed to the designated beneficiaries without going through the public and often lengthy court process known as probate. While offering significant flexibility and privacy, living trusts may not provide the same level of asset protection from creditors or potential tax advantages that an irrevocable trust (which cannot be changed) might offer.

• Example 1 (Estate Planning & Flexibility): Sarah and Tom, a married couple, want to ensure their assets (their home, investments, and savings) are passed to their children efficiently after they both pass away, without the delays and public nature of probate court. They also anticipate that their financial situation or their children's needs might change over time.

  They establish a living trust, naming themselves as trustees and beneficiaries during their lifetimes, and their children as future beneficiaries. This allows them to manage their assets as usual, but the trust owns the assets. If they decide to sell their home and buy a new one, or if one of their children has a significant life event (like a marriage or divorce) that prompts them to reconsider inheritance proportions, they can easily amend the trust document to reflect these changes. This demonstrates the "living" or "revocable" aspect, as they retain full control and the ability to alter the trust's terms.

• Example 2 (Incapacity Planning): David, a single professional, is concerned about what would happen to his financial affairs if he were to become seriously ill or incapacitated and unable to manage them himself. He wants to avoid the need for a court-appointed conservatorship, which can be costly and time-consuming.

  David creates a living trust and transfers his bank accounts and investment portfolio into it. He names himself as the initial trustee and designates his sister, Emily, as the successor trustee. The trust document specifies that if a doctor certifies David's incapacity, Emily will automatically step in as trustee to manage his assets for his benefit, paying his bills and handling his investments according to the trust's instructions. David retains the ability to change Emily as successor trustee or modify the terms of the trust at any point while he is competent, illustrating the revocable nature of the trust.

• Example 3 (Specific Asset Management & Future Changes): Maria owns a small art collection that she intends to leave to her niece, but she also frequently buys and sells pieces. She wants a structured way to manage the collection's ownership and eventual transfer, but needs the flexibility to make changes to the collection itself and potentially her beneficiaries.

  Maria places her art collection into a living trust. She names herself as the trustee, allowing her to continue buying, selling, and curating the collection. The trust document initially names her niece as the beneficiary for the collection. However, if Maria later decides to sell a significant portion of the collection, or if her relationship with her niece changes, or if she wants to add another beneficiary, she can easily amend the trust to reflect these new decisions. This highlights how a living trust provides a flexible framework for managing specific assets while retaining the power to adapt to future circumstances.