A living trust, which is created during the grantor's lifetime, is an estate planning tool used as a holding area for many types of property, including bank accounts, real property and personal property. The grantor, the legal term for the person who creates the trust, can set up his own trust using an online legal document provider or he can hire an attorney to set up the trust. Retitling property in the trust's name, which is known as funding a trust, is a necessary step in creating a functioning trust. A bank account titled to a trust has benefits during the grantor's life and at his death.
One of the main benefits of forming a living trust is avoiding probate. Probate is the process through which the debts and assets of a deceased person are collected and property is distributed to heirs or beneficiaries. Probate can be a long and expensive process depending on the complexity of a person's estate. Property that is titled to a living trust or property that has a beneficiary, such as a retirement account or life insurance, usually is not subject to probate. Most other property must go through probate, unless it is owned jointly with right or survival, meaning the property automatically belongs to the survivor when a co-owner dies. Traditional bank accounts must go through probate unless the account is titled in the name of a living trust, jointly owned or has a payable on death designation.
A bank account that is payable on death means the bank account has a named beneficiary who automatically inherits the bank account upon the death of the bank account owner. A POD account is similar to a living trust in that a POD account avoids probate. One benefit of a POD account is that the POD account does not need to be retitled in the name of a living trust. If you do not have additional assets to place in a trust, setting up a POD account may be a less expensive alternative to creating a living trust. A POD account can be set up at any bank as long as you request this type of account. A traditional bank account is not a POD account. When you fill out the paperwork, write the name of the primary beneficiary to inherit the account and a secondary beneficiary in case the primary beneficiary dies before you do.
If the grantor becomes ill or incapacitated, the trustee or successor trustee of the grantor's living trust will manage the trust and the property in it. A grantor typically nominates himself as trustee during his lifetime, but a successor trustee will assume the role of the trustee if the grantor is no longer able to perform the trustee's duties. A trustee can manage the grantor's bank account titled to the trust. A POD account owner does not have this benefit if the account is not titled to a trust.
Unlike in a POD account, a grantor of a living trust can control how a bank account titled to his trust is distributed to one or more beneficiaries. For example, a grantor may require the trustee to distribute the bank account proceeds to three different beneficiaries rather than just one beneficiary. In addition, a grantor can place any restrictions on distribution of an account titled to his trust. For example, the grantor can stipulate that a bank account may not be distributed to the beneficiary until the beneficiary reaches 25 years old. A POD account does not allow the account owner to place restrictions on the distribution of the account.
References & Resources
- Jupiterimages/Photos.com/Getty Images