What Is An Inter Vivos Trust?

An inter vivos trust, also known as a living trust, is a trust created during the lifetime of the settlor (the person who establishes the trust). Unlike a testamentary trust, which comes into effect only after the death of the testator, an inter vivos trust operates while the settlor is still alive. This trust allows the settlor to transfer assets into the trust, and these assets are managed by a trustee for the benefit of the beneficiaries, according to the terms outlined in the trust deed.

Key Features of an Inter Vivos Trust:

Creation During Lifetime:

An inter vivos trust is created during the lifetime of the settlor. The settlor transfers ownership of assets (such as property, investments, or money) into the trust, where the assets are held and managed for the benefit of the beneficiaries.

Revocable or Irrevocable:

An inter vivos trust can be either revocable or irrevocable:

• Revocable Trust: The settlor retains the right to alter, amend, or revoke the trust during their lifetime. They can also take back the assets.
• Irrevocable Trust: Once the trust is created, the settlor cannot alter or revoke it. The assets are permanently transferred to the trust, and the settlor no longer has control over them.

Immediate Effect:

Unlike a testamentary trust, which is created through a will and only becomes effective after the testator’s death, an inter vivos trust is effective immediately upon creation. The assets are transferred to the trust and begin to be managed by the trustee for the benefit of the beneficiaries.

Trustee:

The trustee is the person or institution responsible for managing the assets held in the inter vivos trust. The trustee has a fiduciary duty to act in the best interest of the beneficiaries and follow the terms set out in the trust deed.

Beneficiaries:

The beneficiaries are the individuals or entities who benefit from the trust. The settlor may designate one or more beneficiaries, and the trust can provide for various purposes, such as supporting family members, funding education, or donating to charitable causes.

Avoidance of Probate:

One of the key advantages of an inter vivos trust is that it helps avoid probate. Since the assets are transferred to the trust during the settlor’s lifetime, they do not need to go through the probate process when the settlor dies. This can save time, legal fees, and the public exposure associated with probate.

Privacy:

Unlike a will, which becomes a public document after probate, the details of an inter vivos trust are typically kept private. This allows for greater privacy in the distribution of assets.

Estate Planning:

An inter vivos trust is a powerful tool in estate planning, allowing individuals to manage and control the distribution of their assets while they are still alive. It is particularly useful for individuals who want to ensure their assets are managed in a specific way before their death.

Differences Between Inter Vivos Trust and Testamentary Trust:

Benefits of an Inter Vivos Trust:

Avoiding Probate:

Since assets held in an inter vivos trust do not go through the probate process, the distribution of assets can occur more quickly, without the delays and costs associated with probate. This also ensures privacy as the details of the trust do not become a public record.

Control Over Assets:

The settlor can exercise control over the assets during their lifetime (especially in the case of a revocable trust). They can alter, revoke, or change the terms of the trust whenever they wish.

Incapacity Planning:

An inter vivos trust can include provisions for managing the settlor’s assets in case of incapacity (e.g., in the event of illness or disability). The trust can specify how the assets should be managed and who should take over the role of trustee if the settlor becomes incapacitated.

Estate Tax Benefits:

Some types of inter vivos trusts, particularly irrevocable trusts, can provide estate tax benefits by removing assets from the settlor’s taxable estate. This can reduce the tax burden on the estate upon the settlor's death.

Continued Management of Assets:

The trust can provide for the continued management of assets in a manner that aligns with the settlor's wishes, especially when beneficiaries are minors or not capable of managing the assets themselves.

Support for Beneficiaries:

The inter vivos trust can be structured to provide ongoing support to beneficiaries, including children, family members with special needs, or charitable organizations.

Example of an Inter Vivos Trust:

Suppose Ramesh, a wealthy business owner, creates an inter vivos trust to manage his assets during his lifetime and after his death. He sets up the trust with his children as beneficiaries. The trust is revocable, so Ramesh retains the right to alter the terms of the trust as his circumstances change. The trust is designed to avoid probate and provide for his children's education and welfare. If Ramesh becomes incapacitated, the trustee will manage the assets on his behalf.

Legal and Compliance Requirements:

Trust Deed:

An inter vivos trust is established by executing a trust deed, which outlines the terms and conditions of the trust, including the trustee’s duties and powers, the beneficiaries, and how the assets should be distributed.

Registration:

While the creation of a trust deed does not necessarily require registration under Indian law, registration may be required in certain cases, especially if the trust involves immovable property.

Tax Compliance:

The trust is required to comply with tax laws, and income generated by the assets in the trust may be subject to taxation. The trustee must file tax returns for the trust, and the beneficiaries may also be taxed on the income they receive.

Conclusion:

An inter vivos trust is a legal tool that allows a settlor to manage and distribute their assets during their lifetime. It offers benefits like avoiding probate, providing privacy, and ensuring that assets are used for the intended purposes, even in the event of the settlor’s incapacity. Inter vivos trusts can be revocable or irrevocable, and they are commonly used in estate planning to control and protect assets for the benefit of beneficiaries.