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Living Trust

What is a Living Trust?

Think of a trust as a place where you put your assets before they are released to the people or organizations that you designate to eventually receive them, it is a legal entity and so are you. Because you and the trust are separate legal entities, anything you transfer from you to the trust becomes property of the trust.

Living trust is created for the purpose of holding ownership to an individual's assets during the person's lifetime, and for distributing those assets after death.

The Living Trust document itself names three different parties. The individual (or couple) that establishes the Trust is named the Grantor (also referred to as the Trustor).

The Trustee is the person named by the Trust as the controller of the Trust's assets (and in many cases, the Trustees are the same people as the Grantors).

On the receiving end, the Beneficiaries are the heirs that will benefit from the Trust once the Grantor's have passed away.

The following are the advantages of using the living trust:
(1) Perhaps the biggest advantage of a living trust is that it does not have to go through probate avoids all legal fees and expenses associated with probate;
(2) provides for property management or disbursement;
(3) assures uninterrupted income and access to principal for family beneficiaries;
(4) avoids the emotional trauma, aggravation and frustration of a complicated probate court procedure;
(5) maintains privacy - nothing is printed in the newspaper as is the case when a person dies either in testate (no will) or with only a will;
(6) eliminates time delays in settling the estate - the successor trustee can immediately disburse the funds as indicated in the living trust agreement;
(7) Protects up to $2,000,000 from federal estate taxes for a single person and up to $4,000,000 for a married couple. This rule works for US citizens only!

What is an AB Trust?

An AB trust, also known as a credit shelter trust, lets a couple pass the maximum amount of property to their children or other beneficiaries after both spouses die, while at the same time ensuring the surviving spouse is financially comfortable during his or her lifetime. When one spouse dies, the assets of the trust are allocated into two separate trusts. One trust sometimes referred to as the "A Trust" or "Survivor's Trust", remains revocable and the assets are under the complete control of the surviving spouse. The other trust sometimes referred to as the "B Trust", "Decedent's Trust", or "Exemption Trust", gives the survivor no rights or limited powers to use the assets allocated thereto. There are both estate tax and non-tax reasons for using an A-B trust.

Estate tax reason for using an A-B trust is that this can effectively double a couple's estate tax exemption as each of the two separate trusts receives its own $2 million exemption, meaning a total of $4 million is sheltered from estate taxes.

Non-tax reasons for using an A-B trust include the desire of one spouse to assure that if he or she dies first, certain assets may be used to provide income or other benefits for a surviving spouse for his or her lifetime with the remaining balance of those assets passing to children or other specified beneficiaries upon the death of the second spouse. Upon the death of one spouse, the surviving spouse generally does not receive all of the deceased spouse's property outright. Instead, the surviving spouse receives a "life estate," which means that he or she can use it for life, but cannot sell it or give it away. This gives the first spouse to die some control over the ultimate disposition of assets after both spouses are deceased.

Once the AB trust is set up, separate records must be kept regarding the trust property. Also, the surviving spouse should spend a lot to administrate and keep an AB living trust, after the first spouse dies, he or she must keep separate books and records for Trust A and Trust B so as to utilize the trust assets properly.

Besides these, after the first spouse dies, the surviving spouse must get a taxpayer ID number for the irrevocable trust and file an annual trust income tax return. Tax returns must be filed in the name of the trust adding extra work to your normal tax return efforts, and when tax code provisions change prior to your trust taking effect, you should revoke the trust and create a new one.

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