A Living Trust is not a real, legal Trust.
Usually, when someone says, “I have a Trust,” they probably don’t, not if they are referring to a Living Trust.
“Living Trust” is a term used to describe something that is actually a Revocable Trust.
And the fact that it is revocable is the critical factor, as I will explain.
In fact, the complete title is Revocable Living Trust.
If it were a figure of speech it would be an oxymoron.
It contains two terms, “revocable” and “trust,” that are contradictory.
So, let’s delve into it.
I will explain what an actual, real Trust is, in legal terms, and why it cannot even be revocable and still be a Trust.
You’ll need to know all about this, if you think you have a Living Trust, or you might create a Living Trust, or especially if you are dealing with someone who claims to have a Living Trust, and claims that the Living Trust owns their real estate.
A LIVING TRUST CAN BE REVOKED
A “Revocable Living Trust” is a very difficult concept to explain because there is so much disinformation about Trusts.
But let’s start with this, and work through the rest.
A real Trust, by legal definition, cannot be revoked.
That’s the law. Keep that in mind.
Therefore, it is impossible to have something called a “Revocable Living Trust” that is really a Trust, because a real Trust is not Revocable.
So, why do so many people believe that a Living Trust is really a Trust?
Well, the “Living” was chosen by the people (non-attorneys, usually salesmen) who promoted and marketed the scheme as a technique for Tax Planning and Estate Planning, that the individual could do for himself without having to pay money to an expert.
But a Living Trust has absolutely no effect whatsoever on your tax situation, because you still personally own all of the assets that you think you are transferring into the so-called Trust. The assets are still your personal property, and income from the assets is still your personal income.
Because a Living Trust is not a legal entity, it does not exist except on that piece of paper you signed and put in your desk drawer.
And because it is not a legal entity, and has no legal existence, it cannot hold title to real estate, and it cannot file a tax return.
Let me repeat: if it is revocable, it is not a Trust, because one of the legal requirements of a Trust is that it be “irrevocable,” that is, not capable of being revoked.
A LIVING TRUST CAN SERVE A PURPOSE
Well, Attorneys are actually setting up legitimate Living Trusts, so they must be good for something.
What is it?
The primary benefit of a Living Trust is avoid the necessity of going through Probate in order to pass the assets of the Deceased to the chosen Beneficiaries of the Deceased.
The Living Trust is also hyped as being a substitute for having a Will, but this is incorrect. Even if you have a Living Trust, you must also have a Will, called a “Pourover Will” that will take care of any assets that you failed to include in your Living Trust.
Here’s how a Revocable Living Trust works.
The person doing all of this is called the “Trustor.”
The Trustor sets up the Living Trust and names himself as the Initial Trustee.
The Trustor also names himself as the Primary Beneficiary of the Trust.
Both of these are not allowed in setting up a real Trust, so the Living Trust does not meet the legal requirements to be a Trust, and it is not a Trust.
The language of the Declaration of Trust that you sign to create the Living Trust says that the Living Trust can be revoked at any time, which is also prohibited with a real Trust.
But, and this is the key to the whole scheme, the language also says something to the effect of “upon my death this Revocable Trust shall become irrevocable, and I name Helen Jones as Successor Trustee, and I name the children of Helen Jones as the Successor Beneficiaries.”
At this point, the point of death, the illegal Revocable Trust immediately becomes a legal Irrevocable Trust.
And if the Trustor has put all of his assets into the Living Trust, then he has nothing that needs to pass through Probate, and the time and expense of such Probate proceedings are avoided.
Do you see how that works?
When done properly, a Revocable Living Trust can be an effective Tax Planning and Estate Planning tool.
A LIVING TRUST CAN CREATE PROBLEMS
A Living Trust can present a lot of potential problems.
The first problem involves trying to deed real estate to the Revocable Trust.
Since it is not a valid legal Trust, it does not exist as a legal entity, and therefore cannot own and hold title to real estate.
And even if it could, real estate that is going into an actual, legal, Trust is not deeded to the Trust, it is deeded to the Trustee of the Trust.
And since the person who set up the Living Trust named himself as Trustee, he would be deeding the property to himself as Trustee of a Revocable Trust that has no legal existence.
There are many other legal problems as well, with Brokerage Accounts and Retirement Accounts, but people just seem to ignore them and pretend that everything is fine.
So, there you have it.
If you decide to use a Living Trust in spite of everything, PLEASE, get one from an Attorney who specialized in Estate Planning, instead of buying one of those Packages from a Salesman.
I can tell you from personal knowledge, it will cost about $5,000 in legal fees to correct the problems caused by using one of those $2,500 Living Trust Packages, and after spending the $7,500 you are just back where you started.
Hopefully, you also have a valid Will.
Otherwise, the State decides who gets your property.
I touch on this same concept in more than one of my books, but the one with the most detailed information is “Do This, Not That!” If you would like to preview it, you can go here on this website to look at it first, use the 3D Flip Reader to look at the Contents and read the first few chapters.
The paperback is available on my Amazon Author Page, along with my other books.
And I have related Articles about real estate investing and other real estate matters from other perspectives on my LinkedIn Page.
I am also active on Quora.com where I have answered over 300 questions, and they have almost 3 Million views.
If you happen to be doing, or if you are considering doing, a Section 1031 Like Kind Exchange, then you should start with a Dictionary, and I have done one, in 3 separate Blog Posts here: Part 1, Part 2, and Part 3. And I have a lot of material for you to consider on my S1031 Exchange website.
You should always check out the credentials of anyone, like myself, who you are relying on for accurate information by looking closely at their Biography. Here’s mine.
And if you think you might like to read one of my books, but can’t decide which one, here are four that I recommend.
I am an Attorney licensed to practice in Texas, North Carolina, Virginia, and the District of Columbia. But I am not your Attorney. I would be honored if I were, but I am not. Reading this Blog does not created an attorney-client relationship between us. Internet content should not be used as a substitute for the advice of a competent Attorney admitted or authorized to practice law in your state or jurisdiction.