An inter-vivos trust is a fiduciary relationship used in estate planning created during the lifetime of the trustor. Also known as a living trust, this trust has a duration determined at the time of its creation and can involve the distribution of assets to the beneficiary during or after the trustor’s lifetime. The opposite of an inter-vivos trust is a testamentary trust, which takes effect upon the death of the trustor.
Key Insights Into Inter-Vivos Trusts
- An inter-vivos trust is a living trust created to hold assets of a trustor.
- A major benefit is that it helps avoid probate or the legal process of distributing the owner’s assets after their death.
- The trustor can be the trustee in an inter-vivos trust during their lifetime or until a backup named in the trust is allowed to take over.
How Inter-Vivos Trusts Work
A trust is typically established to hold assets for the benefit of a party called the trust beneficiaries. A trustee is typically assigned to manage those assets and ensure that the trust agreement is followed, including making sure the assets are distributed to the named beneficiaries.
However, an inter-vivos trust is termed a living trust as it allows the owner or trustor to use the assets and benefit from the trust during their lifetime. Once the trustor passes away, the assets are distributed by the trustee to the beneficiaries. While living, the trustor—or trustors in the case of a married couple—can act as the trustee, managing the assets until they are no longer able, at which point a named backup trustee assumes the duties. A living trust can mainly be categorized as either revocable or irrevocable.
Revocable Trust
A revocable trust allows changes to be made by the trustor or grantor and can also be canceled. Any income earned in the revocable trust is typically paid to the trustor. Following the death of the trustor, the income and assets are transferred to the beneficiaries. Revocable trusts are favored for their flexibility during the lifetime of the trustor while also allowing the distribution of the assets from the trustor’s estate seamlessly.
Irrevocable Trust
An irrevocable trust does not allow changes to be made by the trustor or grantor. Once established as an irrevocable trust, the trust cannot be canceled or altered. Assets placed in an irrevocable trust result in the trustor giving up legal ownership. The trustee manages these assets and distributes them to beneficiaries upon the trustor’s death. This setup provides clear legal separation, aiding in reducing the estate’s value and relevant taxes.
Benefits of An Inter-Vivos Trust
An inter-vivos trust is a pivotal estate-planning tool that helps avoid probate, the court process of distributing the deceased’s assets. Probate can be lengthy, costly, and publicly expose a family’s financial issues. A properly established trust ensures assets get distributed to the intended recipients promptly and privately, easing the transition for surviving family members.
In a living revocable trust, the trustor can also be the trustee, allowing the owner to control the assets. However, estate taxes might still apply if the asset values exceed the estate-tax exemption at the time of the trustor’s death.
Creating a living irrevocable trust allows a trustor to effectively reduce the estate’s value since all rights to the assets are relinquished, thus potentially reducing estate taxes. A typically established living trust is revocable and becomes irrevocable upon the trustor’s death.
Establishing an Inter-Vivos Trust
In creating a trust, the grantor names the trust parties, including the grantors typically the spouse, the beneficiaries, and the trustee. Often, spouses are named as trustees with a contingent trustee named in the event of both their deaths.
Almost any asset can be held in a trust including real estate, investments, and business interests, which can be re-titled in the trust’s name. Additionally, assets like life insurance and retirement plans that pass to a designated beneficiary need not be included.
Besides bequeathing assets to specific beneficiaries, trusts can include trustee instructions guiding the timing and management of distributions. Generally, a will is required to execute the trust, effectively making the trust the primary beneficiary. wills also function as catch-all mechanisms for assets excluded from trusts and establish guardianships for minors.
Related Terms: estate planning, trust, revocable trust, irrevocable trust, probate
