Although they are commonly overlooked, trusts constitute an important and valuable part of estate planning. Trusts can take a variety of different forms, but they all generally provide ways to protect an estate and ensure that the trust creator's wishes are carried out. In essence, a trust is a legal word or concept that describes a relationship between two people in which one person holds the legal title to property for the benefit of the other person. In many cases, there are three primary people who are involved with a trust: the settlor, trustor or grantor, the trustee and the beneficiary.
A living trust is one particular type of trust. It is designated a "living" trust because the grantor creates the trust while he or she is still living, instead of through a will after the grantor's death. There are many considerations involved in deciding whether or not to create a living trust. Potential grantors should understand that creating a living trust will not save the grantors themselves money because the grantor must pay the costs associated with setting up the trust and must fund the trust. One of the goals in creating a living trust is to save potential heirs money, however-or to save money from the estate and protect the estate.
In addition to saving money for the person's heirs, a living trust is often used to avoid probate once the grantor passes away. It is for these reasons that a living trust is most commonly recommended as an estate planning strategy for individuals with significant wealth or large estates. With large estates, there are more costs involved in the probate process and the potential lose money from the estate upon the grantor's death may also be greater. Depending on the particular circumstances, other estate planning tools or vehicles may be better suited for those with smaller estates than a living trust.
Individuals interested in creating a living trust are generally not advised to engage in the process of trust creation without the assistance of experienced professionals. There are many complicated legal and tax issues that make the trust creation process very complex. If the trust is not created correctly, it may not be legally valid or may not effectuate the grantor's wishes.
Source: MichiganLegalAid.org, "Living Trusts," 2005