Inter Vivos Trust: A Comprehensive Guide with Practical Examples

inter vivos trust

A trust is established so that a trustee can manage assets for the benefit of those we call the trust beneficiaries. Assets that are put into a trust belong to the trust itself and not to the trustee. these assets remain subject to the terms and conditions of the trust contract. There are different types of trusts. In this article, however, we will be studying what an inter vivos trust is, as well as the revocable and irrevocable trust. We have given some examples to illustrate how an inter vivos trust works.

The parties involved in creating a trust include the trustor, the trustee, and the beneficiary. the trustor is the owner of the assets and therefore creates the trust. the trustee manages the trust and ensures that the beneficiary gets the assets in due time. the beneficiary is the one who gets the benefits of the trust. in some cases, the trustor assumes the position of a trustee until he is no longer able, at which time a named trustee takes over.

What is an Inter Vivos Trust?

An Inter Vivos Trust is a trust which a living person, the trustor, creates to benefit another person. The other person is the trust beneficiary. This trust is usually in the form of assets such as real estate and is managed by a trustee. This can be a person or a bank. The trustee ensures that the trust agreement is followed and that the beneficiary receives the asset in due time.

We can also refer to an Inter Vivos Trust as a living trust. It allows the trustor to benefit from it during his lifetime. This is unlike a testamentary trust which takes effect from the trustor’s death. At the death of the trustor, the trustee distributes the assets to the beneficiary. Inter vivos trust has a duration that is determined at the creation of the trust.

An inter vivos trust states the beneficiary of an asset before the death of the trustor. It also states the time the trustor will hand over the assets to the beneficiary, whether before or after the death of the trustor. One advantage of this trust is that the trustor will be sure that the assets get to the beneficiary without any hitch.

Read also: TESTAMENTARY TRUST: Definition, Examples, Requirements

What differentiates an inter vivos trust from a testamentary trust?

An inter vivos trust is one that the trustor creates during his lifetime, while a testamentary trust takes effect after the death of the trustor. Unlike a testamentary trust, an inter vivos trust does not go through probate. A testamentary trust or a will must pass through probate before it can take effect. An inter vivos trust is not subject to public records as opposed to a testamentary trust. the trustor can choose to transfer assets to the beneficiary immediately after death, or at a designated time. 

Assets passed through a trust do not avoid estate tax, and as such, they are included in the taxable estate. The federal estate tax currently applies to estates that are worth more than $5.43 million. However, it is not the same at the state level. While some states apply tax to estates of moderate amounts, some actually apply no tax at all. 

For clarity purposes, let’s see some examples of an inter vivos trust below:

Inter Vivos Examples

One of the examples of an inter vivos trust is when a parent decides to set up an education fund for his child’s college education. The parent can be the trustee until he is no longer able, at this time a named trustee takes up responsibility. Let’s see another example. If John wants to hand over his landed property to his cousin James, a trust will be created by John, stating James as the beneficiary of the property. The trust will also indicate when the ownership of the property will take effect. Prior to that time, John can still retain ownership of the property and receive the income generated by the property. We also refer to this as an inter vivos trust.

However, John may decide to cancel the trust. Will it be possible? This brings us to the two categories of inter vivos trust: revocable trust and irrevocable inter vivos trust.

Revocable Inter Vivos Trust

A revocable inter vivos trust allows the trustor or grantor to make changes to the trust. Most times, the trust creator assumes the duties of the trustee until he is no longer capable. In that case, a named trustee takes over the managing and distribution of assets. The trustor can cancel the trust, and receive payment for any income earned in the trust. Revocable trusts are quite flexible, the trustor gets to make some adjustments from time to time, and can cancel the trust entirely.

The major advantage of this trust is that it is revocable. The trustor can cancel the trust or alter it in whichever way he deems fit. This is in contrast to an irrevocable inter vivos trust that cannot be changed once it is created. However, a revocable trust remains revocable only as long as the trustor is alive. The trust becomes irrevocable once the trustor dies. 

When creating a revocable inter vivos trust, the trustor is required to complete a trust form. The form serves as a document identifying the trustor, naming the trustee and the successor trustee. The document also names the beneficiaries while identifying the assets held in the trust. Finally, the document will specify the terms of the trust, including the time of distribution of the assets to the named beneficiaries. The trustor or grantor signs the trust afterward in front of a notary officer.

Irrevocable Trust

An irrevocable inter vivos trust does not allow changes to be made to the trust by the trustor. Once a trust has been established as an irrevocable trust, the trustor has given up legal ownership of the assets, and as such cannot alter or cancel the trust.

With an irrevocable living trust, the trustor cannot alter or terminate the trust without consent from everybody named in the trust. The trustor can not remove a beneficiary from the trust except he or she consents to it.

A major difference between the revocable and irrevocable trust is in the nature of taxation. The assets in a revocable trust belong to the trustor and as such, any income that comes from them goes to the trustor, and he pays the taxes accordingly. With an irrevocable trust, the assets no longer belong to the trustor and so all taxes are applicable to the trust.

Conclusion

An inter-vivos trust is important in estate planning. It helps avoid probate, which is the process of distributing the deceased’s assets in court. This process can be lengthy, costly, and then it exposes a family’s private financial matters by making them a matter of public record, which is rather undesirable. A properly established inter vivos trust helps to ensure that the assets are distributed to the beneficiaries with little or no intrusions. 

When creating trust, it is equally important to create what we call a pour-over will. If the trustor mistakenly leaves an asset out of the trust, the asset won’t be lost. The pour-over will allow him to transfer the leftover asset to the trust. It is also worthy to note that assets in a revocable trust remain available to the trustor’s creditors. However, the creditors might experience a little difficulty accessing them. The creditors will have to, first of all, send a petition to the court for an order that will grant them access to those assets.

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