How is an irrevocable living trust used in estate planning?

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Answered by: Susan, An Expert in the Wills and Estate Planning - General Category
A living trust is a document used in an estate plan and is most often used by those desiring to pass assets on to others while avoiding the administrative hassle and possibly publicity involved in the probate process. Due to the public nature of all probate documents and proceedings, those desiring privacy often utilize living trusts.



Under a living trust, a person (the grantor) places property in trust for the benefit of one or more other people (the beneficiaries). The trust document then defines a trigger event, often the death of the grantor, that results in the trust property being distributed to the beneficiaries.

A living trust can either be revocable or irrevocable. A revocable living trust is one that the grantor retains control over, meaning that he can take back the property or change the beneficiaries at any time. An irrevocable living trust is one that cannot be changed once it has been signed by the grantor. With certain limited exceptions regarding transfers occurring within three years of death, only property owned at the time of death is subject to estate taxes.



Therefore, an irrevocable living trust can be used to avoid both probate and estate taxes, because ownership of the property transfers to the trust while the grantor is still alive. The property held in a revocable trust, on the other hand, is still the property of the grantor and does not, therefore, avoid estate taxes. It does, however, still allow the grantor to avoid probate upon death.

When setting up a living trust, the grantor must give careful consideration to the choice of beneficiaries and be sure to include backup beneficiaries. The trust also should address what will happen if the beneficiaries die prior to the distribution of property held by the trust. If the trust does not specify what will happen after a beneficiary dies, the property in the trust will go back to the grantor’s estate and be distributed according to his will.

Also, if used to avoid probate, all of the grantor's assets must be moved into the trust. Any assets that remain outside the trust and are owned by the grantor at death will be subject to probate.A valid trust should always address where the assets will go once all of the beneficiaries have died. There also may be gift tax consequences involved in setting up a trust, so always consult with an attorney. It also is essential for any estate plan that involves a living trust also to include what is known as a "pourover will" so that any assets not captured by the trust can be distributed according to the grantor's wishes.

A living trust alone is not enough to avoid probate and estate taxes. In most cases, the grantor still has some small amount of property left at death, such as a final social security check. A “pourover will” is a good companion to a living trust, because it provides that all of this remaining property will be “poured over” into the living trust.

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