What Is a Living Trust?

A living trust contains an agreement that outlines and identifies your assets, beneficiaries, and trustees. It provides asset protection and potential tax benefits and lets you distribute your property without going through probate proceedings.

Benefits of a Living Trust

A grantor creates a living trust while the grantor is alive. These trusts are sometimes called “inter vivos” (Latin for trusts “among the living”). This contrasts with testamentary trusts, created in a grantor's will and only exist when the grantor dies.

Trusts can be revocable or irrevocable. The pros and cons depend on the type of living trust you create.

Revocable Living Trust (RLT)

The grantor of a revocable living trust reserves the power to change or revoke the terms of the trust. Even though the trustee holds legal title, the grantor retains some control over the trust assets. In many cases, the grantor is the trustee.

The flexible nature of revocable living trusts (RLT) is attractive to grantors. These kinds of trusts are far more common than irrevocable living trusts (ILT).

Advantages of an RLT include:

• Avoiding Probate. This is the most commonly cited reason for having an RLT. Probate is the court-supervised process of (1) checking if a will is valid when one exists and (2) distributing a person's property (their “estate") when they die. Depending on the complexity of the estate, the probate process can be time-consuming and expensive. By transferring property into an RLT, those assets avoid probate when the estate owner dies.

• Protecting Privacy. Probated wills are public records. This means anyone can go to the probate court and look at the will. The same is not true for an RLT. A grantor can discreetly transfer property into the RLT. Those assets avoid probate and are shielded from prying eyes.

• Protecting Beneficiaries. An RLT can be used to protect vulnerable beneficiaries. Trust beneficiaries might include minor children, a loved one with special needs or experiencing an incapacity. You can also use a trust to protect assets from a family member you do not trust to manage assets responsibility. An RLT allows these individuals to benefit from the assets without giving them control.

• Asset Management. RLTs allow grantors to pool assets for efficient and productive management. For example, a grantor can pool real property into a trust and delegate management to a trustee who maintains a real estate portfolio. This can increase the value of the trust property, spare yourself the hassle of managing the property, and retain ultimate control.

Irrevocable Living Trust (ILT)

An irrevocable trust cannot be changed without the beneficiary's consent once created. With this type of trust, the grantor relinquishes all ownership and control over the trust assets. This limitation may be unattractive to some grantors. The grantor sacrifices the power to change the trust, which comes with other advantages unavailable with a revocable trust. Life insurance policies often fund ILTs.

• Asset Protection. An ILT transfers complete ownership and power from the grantor to the trust. The trust assets are protected from the grantor's creditors when the assets are in the name of the trust. You can also use an ILT to segregate assets away from marital property. This segregation protects them from an ex-spouse in the event of a divorce.

• Reducing Estate Taxes. You can reduce your taxable estate by transferring assets into an ILT. The federal estate tax exemption is currently set at $12.920 million in 2023. Thus, this ILT perk does not benefit most people. A few states also tax your estate when you die. Be sure to check for estate tax exemptions at the state level. A married couple can save on estate taxes by using A-B Trusts: The Tax-Saver.

For many people, the costs of an ILT outweigh the benefits. A trust or estate planning attorney can help you decide if an ILT is right for you.

Establishing the Trust Terms

A trust involves a few individuals. A grantor, sometimes called the settlor or trustor, transfers property to a trustee to be managed for a beneficiary. The trustee technically owns the transferred property. However, they are constrained by a fiduciary duty to manage the trust assets. The trustee must manage the trust productively and responsibly for the beneficiary's benefit.

The “trust agreement,” “declaration of trust,” or other trust document outlines the terms of a trust. State law governs the specific requirements of this document. Therefore, a local trust or estate planning attorney can also be beneficial here.

In general, a living trust document will:

• Explain the purpose of the trust

• Identify assets for the trust

• Name beneficiaries

• Name a trustee and, sometimes, a successor trustee in case the first cannot or chooses not to perform that role

• Explain the trustee's rights, powers, and duties

• Explain the plan for distributing assets to beneficiaries

• Explain how the trustee will be compensated

A trust agreement should also specify whether the trust is revocable or irrevocable. In many states, a trust is considered revocable by default. The trust document must clarify that the grantor intends to create an irrevocable trust.

Cost of Creating and Maintaining a Living Trust

Many people associate trusts with extreme wealth. In reality, you do not need a multi-million-dollar estate to use a living trust, particularly a revocable living trust.

Do-It-Yourself

Depending on the complexity of your estate, you can set up a revocable living trust yourself. 

If you decide to set up an RLT independently, having an attorney review your work is still wise. Getting an attorney to review your legal documents ensures they are well-formed and valid. It would be best if you did not set up an ILT alone. Speak with a qualified attorney or financial advisor who can help.

Filing, Transfer, and Maintenance Fees

You will likely encounter filing fees when first creating your living trust. Transferring property into the trust may also come with costs. Fees depend on the state you create the trust. The kind of property you choose to transfer also influences the fees.

It is wise to consider trustee compensation. Often, trustees receive payment from a cut from the trust income. If you hire a trust company to manage the trust, their fee will likely be a fixed percentage of the total assets under management.

Even with a Living Trust, You Should Still Have a Will

Even if your estate plan features a living trust, you should consider having a last will and testament. It may be a simple document that leaves “everything you own” to a specific person. Alternatively, it may be a complicated document that distributes your estate to multiple parties.

Either way, assets not put into your living trust remain part of your estate. Without a will instructing how to distribute this remaining property when you die, distribution occurs according to your state's intestacy laws. These laws may or may not align with your wishes.

If you create a living trust for estate planning purposes, consider making a “pour-over will.” This will “pours” what remains of your estate into a designated trust when you die. Untransferred assets are still part of your estate at death. Consequently, they must still go through the probate process before pouring into the trust. Not all states recognize pour-over wills. Be sure to check your state's laws.

Along with a will, your comprehensive estate plan should consider including:

• A power of attorney

• Health care directives

• A living will

• A review of assets to ensure beneficiary designations for assets such as bank and retirement accounts are up to date

Need Help Setting Up a Living Trust?

Setting up and managing living trusts can involve a great deal of paperwork. This is one reason why living trusts are more complicated than wills. If you do not feel confident preparing a trust, the peace of mind an attorney can provide may be well worth it.

Living trusts are popular estate planning tools. Depending on your estate planning goals, this arrangement may suit you. If you would like help setting up or managing your living trust, a local estate planning attorney can provide valuable legal advice.