Revocable Trusts: Living, Totten, and Nominee
Living trusts, Totten trusts, and nominee trusts are the main types of revocable trusts. They can be revoked, amended, or terminated by the trust grantor, the person who creates the trust, any time before his or her death. Revocable trusts are an estate planning tool that avoid probate court and therefore prevent the transfer of assets from becoming public.
Living trusts: Transferring assets without the probate court
Living trusts are created and funded during the grantor’s lifetime. Assets are moved from the grantor’s estate and transferred either directly to appointed heirs upon the grantor’s death or into the trust without interference from a probate court. For income tax purposes, living trusts are usually treated as grantor trusts, where the grantor maintains control of the property in the trust.
The grantor or someone given the grantor’s power of attorney can transfer assets into a living trust. Living trusts have provisions for the incapacity of one trustee and the appointment of a predetermined successor, or a procedure for determining a successor. This way the probate court doesn’t have to appoint a guardian or conservator.
Trusts designed to continue beyond the grantor’s death become irrevocable at death. The provisions in the trust instrument can no longer be changed or revoked. This now-irrevocable trust will have new trustees and beneficiaries and will require a new estate TIN.
Totten trusts: Estate planning without a trust instrument
Totten trusts are also designed to transfer assets from the grantor’s estate without interference from a probate court. This time, however, there’s no trust instrument. The grantor opens a specific bank or brokerage account by using formulaic language, and filling out specific paperwork that the bank or brokerage firm provides.
Here are some things to remember about Totten trusts:
The income earned is taxed to the grantor.
These accounts use the grantor’s Social Security Number to report any earnings.
No separate tax returns are necessary.
Upon the grantor’s death, no probate is necessary for the assets in the account.
Each Totten trust account a grantor opens has its own paperwork.
Not all states recognize Totten trusts, and many states have restrictions and regulations for them. Check with the bank or brokerage firm before you attempt to use one. If your state doesn’t honor the payable-upon-death designation, the person you name as the successor will still inherit the property but it must pass through the probate court.
Nominee trusts: Transfer real estate privately
Many states require a record of trust instruments that hold real estate at the registry of deeds. Nominee trusts, which only hold real estate, allow for private real estate transfers.
The beneficiaries, not the trustee, control what happens in a nominee trust. A Schedule of Beneficial Interest, which lists the names and percentage ownership of each of the beneficiaries, is attached to the original nominee trust instrument but not to the copy recorded at the registry of deeds. The names of the people who actually control the property are kept private.
Nominee trusts are disregarded for income tax purposes and don’t require separate tax returns. The beneficiaries claim any income or deductions that the real estate produces on their personal income tax returns.