An inter vivos trust, often referred to as a living trust, is a legal document created during an individual's lifetime to hold assets for the benefit of designated beneficiaries. This type of trust is a fundamental component of estate planning, allowing the grantor (the person who creates the trust and transfers assets into it) to maintain control over their assets while alive and dictate their distribution after death. The inter vivos trust establishes a fiduciary relationship where a trustee manages the assets for the benefit of the beneficiary or beneficiaries.
History and Origin
The concept of trusts dates back to medieval English common law, where they were used to bypass restrictions on land ownership and avoid feudal obligations. Early forms of trusts allowed individuals to transfer legal title of property to another party while retaining the beneficial use, thereby shielding assets from certain claims or taxes.9,8 While the specific form of the inter vivos trust evolved significantly, its core principle—separating legal and equitable ownership—remains rooted in this historical foundation. Modern inter vivos trusts gained prominence as a sophisticated tool for managing assets and facilitating transfers outside the often lengthy and public probate process.
Key Takeaways
- An inter vivos trust is established and funded during the grantor's lifetime.
- It allows for the management and distribution of assets without requiring probate.
- The grantor can typically serve as the initial trustee, maintaining control over the assets.
- Assets placed in an inter vivos trust are not subject to the public probate process, offering privacy.
- Inter vivos trusts can be either revocable trust or irrevocable trust, each with distinct implications for control, flexibility, and tax treatment.
Interpreting the Inter vivos trust
An inter vivos trust is interpreted by its terms, which are legally binding instructions for how assets are to be managed and distributed. The effectiveness of an inter vivos trust hinges on proper funding, meaning that assets must be formally retitled into the name of the trust. If assets are not transferred, they may still be subject to probate and bypass the trust's intended distribution. Understanding whether the trust is revocable or irrevocable is crucial, as this determines the grantor's ability to modify or terminate it after its creation. A revocable inter vivos trust can be altered or canceled by the grantor at any time, providing flexibility, whereas an irrevocable inter vivos trust generally cannot be changed without the consent of the beneficiaries, offering greater asset protection.
Hypothetical Example
Consider Maria, a single mother with two adult children, who wants to ensure her assets are distributed efficiently and privately upon her death. She creates a revocable inter vivos trust, naming herself as the initial trustee and her children as beneficiaries. She then transfers her home, investment accounts, and personal belongings into the trust. She also names her eldest daughter as the successor trustee to manage and distribute the assets after her passing.
During her lifetime, Maria retains full control over the assets within the trust, able to buy, sell, or manage them as she sees fit. If she decides to sell her home, she does so as the trustee of her trust. Upon her death, her daughter, as successor trustee, steps in. The assets held in the trust bypass the probate court, allowing for a quicker and more private distribution to Maria's children according to the trust's terms, rather than a potentially lengthy process involving her will.
Practical Applications
Inter vivos trusts are widely used for various estate planning purposes. One primary application is avoiding probate, which can be a public, costly, and time-consuming court process. By holding assets in a living trust, individuals can ensure a smoother and more private transfer of wealth to their beneficiaries.
They are also utilized for managing assets during incapacitation. If the grantor becomes unable to manage their financial affairs, the named successor trustee can seamlessly take over the management of trust assets without the need for court intervention, such as a guardianship. Additionally, inter vivos trusts can be structured to provide specific instructions for beneficiaries, such as distributing assets at certain ages or for particular purposes, and can include spendthrift provision to protect beneficiaries from creditors.
For tax considerations, the Internal Revenue Service (IRS) provides guidance on how trusts and estates are taxed. An inter vivos trust can have implications for estate tax and gift tax depending on its structure (revocable vs. irrevocable) and the value of assets transferred. For instance, while a revocable inter vivos trust does not remove assets from the grantor's taxable estate for federal estate tax purposes, certain irrevocable trusts might.,,
7#6#5 Limitations and Criticisms
Despite their advantages, inter vivos trusts have limitations. Establishing and maintaining an inter vivos trust can be more complex and costly upfront compared to a simple will, involving legal fees for drafting and the administrative burden of transferring asset titles into the trust. If assets are not properly transferred into the trust (a process known as "funding the trust"), the trust may not fully achieve its intended purpose, and those unfunded assets could still be subject to probate.
Furthermore, some unscrupulous businesses have exploited the complexity of trusts, engaging in misleading sales practices or selling unnecessary or poorly drafted living trusts. The Federal Trade Commission (FTC) has issued warnings about "living trust scams" where consumers are pressured into purchasing trusts that are either inappropriate for their needs, overpriced, or fail to deliver promised benefits.,, T4h3e2se schemes often misrepresent the costs and benefits of trusts versus other estate planning tools or falsely claim affiliations with legitimate organizations. Whi1le a properly executed inter vivos trust can be a valuable tool, consumers are advised to seek independent legal and financial advice to determine if it aligns with their specific circumstances.
Inter vivos trust vs. Testamentary trust
The primary distinction between an inter vivos trust and a testamentary trust lies in when they are established and become effective.
| Feature | Inter vivos trust | Testamentary trust |
|---|---|---|
| Creation | Created and funded during the grantor's lifetime. | Created through a will and takes effect upon death. |
| Effectiveness | Becomes effective immediately upon signing and funding. | Becomes effective only after the will is probated. |
| Probate | Assets held in the trust avoid probate. | Assets must go through probate as part of the will. |
| Privacy | Offers privacy, as its terms are not public. | Its terms become public record during probate. |
| Control | Grantor typically retains control during their lifetime (if revocable). | Grantor has no control after death; trustee takes over. |
The choice between an inter vivos trust and a testamentary trust depends heavily on the individual's specific goals regarding privacy, probate avoidance, control over assets during life, and cost considerations.
FAQs
What assets can be put into an inter vivos trust?
Nearly any asset can be transferred into an inter vivos trust, including real estate, bank accounts, investment portfolios, business interests, and personal property. It is crucial to formally retitle these assets in the name of the trust to ensure they are properly "funded."
Is an inter vivos trust always revocable?
No, an inter vivos trust can be either revocable trust or irrevocable trust. A revocable inter vivos trust can be changed or dissolved by the grantor, while an irrevocable inter vivos trust generally cannot be modified or canceled without the consent of the beneficiaries, offering different levels of flexibility, control, and potential tax benefits.
Do I still need a will if I have an inter vivos trust?
Yes, even with an inter vivos trust, it is generally advisable to have a "pour-over" will. This type of will ensures that any assets not transferred into the trust during your lifetime, or assets acquired shortly before your death, are automatically "poured over" into the trust after a limited probate process, ensuring all assets are eventually distributed according to your trust's terms.
How does an inter vivos trust provide privacy?
Because assets held in an inter vivos trust typically bypass the probate court process, the details of the trust, its assets, and the beneficiaries remain private. Unlike wills, which become public record during probate, the terms of an inter vivos trust are generally not subject to public disclosure.
What happens if the grantor of an inter vivos trust becomes incapacitated?
If the grantor of an inter vivos trust becomes incapacitated, the designated successor trustee steps in to manage the trust's assets according to the trust's instructions. This avoids the need for a court to appoint a conservator or guardian, ensuring continuity of financial management and avoiding public proceedings.