After you make your living trust, you may end up living with your trust for a long while—and life changes can present issues for your living trust. Here is information about how to proceed if you run into any of these common situations.
No separate income tax records or returns are necessary as long as you are the trustee of your own living trust. (IRS Reg. § 1.671-4.) Income from property in the trust must be reported on your personal income tax return.
However, if a trust is ongoing after a grantor dies -- for example, a child's subtrust -- you may need to file a trust tax return. See After a Grantor Dies.
You have complete control over the property you hold in the living trust. If you want to sell or give away any of it, simply go ahead, using your authority as trustee. You (or you and your spouse or partner, if you made a trust together) just sign ownership or transfer documents (the deed, bill of sale or other document) in your capacity as trustee of the living trust.
EXAMPLE: Mel holds his house in his living trust. When he sells it, he signs the new deed as "Melvin Owens, trustee of the Melvin Owens Revocable Living Trust dated June 8, 20xx."
If you and your spouse or partner made a trust together, either of you has authority over trust property. That means that either of you can sell or give away any of the trust property -- including the property that was co-owned or was the other's separate property before it was transferred to the trust. In practice, however, both of you will probably have to consent to transfer real estate out of the living trust. Especially in community property states, buyers and title insurance companies usually insist on both spouses' signatures on transfer documents.
If, for any reason, you want to take property out of the trust but keep ownership of it, you can transfer it to yourself. The process is, essentially, the reverse of the process you followed to transfer the property to the trust. (See Transferring Property to the Trust.)
EXAMPLE: Janice wants to take her house out of her living trust but keep ownership in her own name. She makes the deed out from "Janice Yamaguchi, trustee of the Janice Yamaguchi Revocable Living Trust dated November 6, 20xx" to "Janice Yamaguchi."
If you take property out of the trust, you will also need to make some changes to your trust document.
If you add property to your living trust, you may need to amend the trust document (as well as the property schedule) to name a beneficiary to inherit the property. (See Amending Your Trust Document.)
You may simply change your mind about who you want to inherit trust property or who you want to serve as your successor trustee. To change these or other terms of your living trust, you'll need to make a trust amendment.
If you get married or have a child, you'll almost certainly want to amend your trust document to provide for your new spouse or offspring. (Your spouse or child may be entitled, under state law, to some of your property.)
If you divorce, you should revoke your living trust. In several states, provisions of a living trust that affect a spouse are automatically revoked by divorce, but you shouldn't rely on these laws. Better to have it in writing.
Your living trust is still valid if you prepare it in one state and then move to another. You may, however, need to take some actions after your move:
If you and your spouse move to another state, in most cases, the move does not change who owns what. But everything you and your spouse acquire in the new state is subject to that state's laws regarding ownership.
EXAMPLE: Leah and Ben move from Texas, a community property state, to Illinois, a non-community property state. In Texas, money either one earned from working belong to both spouses equally, which means that the car Leah bought with her salary is jointly owned by Leah and Ben. That doesn't change when they move to Illinois. After they move, however, each spouse's salary is his or her separate property.
If, however, you move from a non-community property state to a community property state, the move may change which spouse owns what. California, Idaho, Washington and Wisconsin have rules that treat certain property you bring with you as if you had acquired it in the community property state. Here's the general rule: If the property would have been community property had you acquired it in the new state, it is treated like community property at death or divorce. (The legal term for such property is "quasi-community property" or, in Wisconsin, "deferred marital property.") This means that each spouse owns half of this property and can leave only that share at death. One important exception: These rules usually don't apply to real estate.
EXAMPLE: Carlo and Sylvia, a married couple, move from New York to California. Their car, bought in New York with Carlo's earnings and registered in his name, is quasi-community property -- which means that once Carlo and Sylvia settle in California, the car would be considered to belong to both of them if they divorce or one of them dies.
Obviously, this can be a very complicated subject. The good news is that you need be concerned about this issue only if all of these three things are true:
In this situation, you have two options:
Your state's law determines the choices you have when it comes to arranging for someone to manage property left to young beneficiaries. In all states, you can create a child's subtrust for any beneficiary who might inherit trust property before he or she is 35. But state law determines whether or not you have another option: appointing someone to be the custodian of trust property inherited by a young beneficiary.
Only South Carolina does not allow custodianships, so if you move to or from South Carolina, you may want to revisit how you provide Property Management for Young Beneficiaries through your trust.
Different states entitle surviving spouses (and in some unusual circumstances, children) to claim different shares of a deceased spouse's estate. If you haven't left much property to your spouse or child and are concerned that either might challenge your estate plan after your death, you'll want to know what your new state's laws say. You may want to amend your trust document or other parts of your estate plan.
See an estate planning lawyer. If you haven't left at least half of your property to your spouse, we recommend that you see an estate planning lawyer.
If you and your spouse or partner made a shared living trust, when one dies the other will probably inherit some, if not all, of the deceased grantor's trust property outright.
The survivor may need to amend his or her trust to name beneficiaries for property inherited from the deceased spouse. (See After a Grantor Dies.) The survivor may also want to amend the trust document if he or she left property to the now deceased spouse or partner.
If you left much or all of your trust property to one person, and that person dies before you do, you may well want to amend your trust document. If you named an alternate beneficiary for the deceased beneficiary, there's not an urgent need to amend the trust document; the alternate will inherit the property. But amending it makes sense, so that you can name another alternate beneficiary. See Amending Your Trust Document.
If your wealth increases much more than you expected -- perhaps because of a surprise inheritance or business success, it might mean an estate tax bill after your death. You might want to look into creating an AB trust. You can learn more about AB trusts at Nolo.com.