What Is a Living Trust? A Plain Guide

Many people hear the phrase living trust and assume it is only for the wealthy. In fact, living trusts are a common estate planning tool used by families of many income levels. Here is a plain guide to what a living trust is, how it works and when people choose one.

This article is general information, not legal advice. Laws differ by state and country, so speak with a qualified attorney about your own situation.

The Basic Idea

A trust is a legal arrangement in which one party holds property for the benefit of others. A living trust is a trust you create while you are alive, as opposed to a trust created by your will after death.

There are three roles. The grantor, sometimes called the settlor or trustor, creates the trust and puts property into it. The trustee manages that property. The beneficiaries are the people who benefit from it. With a typical living trust, the same person fills all three roles during their life. You create the trust, you manage it, and you use the property as before.

The trust document also names a successor trustee. That person takes over managing the trust if you die or become unable to handle your affairs, and then distributes the property according to your instructions.

Revocable and Irrevocable Trusts

Most living trusts are revocable. That means you can change the terms, add or remove property, or cancel the trust completely while you are alive and competent. Because you keep control, a revocable trust generally does not protect assets from your creditors, and its assets are usually still treated as yours for income tax purposes.

An irrevocable trust is much harder to change once it is created. People use irrevocable trusts for specific goals, such as certain tax planning or asset protection strategies. Because they involve giving up control, they need careful advice.

Why People Use a Living Trust

Avoiding probate. Probate is the court process that oversees how a deceased person's estate is settled. Property held in a properly funded living trust usually passes to beneficiaries without going through probate, which can save time and some costs depending on the state.

Privacy. A will that goes through probate typically becomes a public court record. A trust generally stays private.

Planning for incapacity. If you become unable to manage your money, your successor trustee can step in and handle trust property without a court appointed guardian or conservator.

Property in more than one state. People who own real estate in several states sometimes use a trust to avoid separate probate proceedings in each state.

Funding the Trust

Signing a trust document is only the first step. A trust controls only the property placed into it. This is called funding the trust.

Funding usually means retitling assets in the name of the trust. For a house, that typically involves signing and recording a new deed. Bank and investment accounts may be retitled or given transfer instructions. Some assets, such as retirement accounts and life insurance, usually pass through beneficiary designations instead and are handled separately.

A trust that was never funded may leave property outside it, and that property may still need to go through probate. This is one of the most common estate planning mistakes.

Trusts, Wills and Costs

A will takes effect only at death and generally must go through probate. It can also do things a trust cannot, such as naming a guardian for minor children.

For that reason, people with a living trust often also sign a pour over will. This simple will directs that any property left outside the trust at death be transferred into it.

Setting up a living trust usually costs more at the start than writing a simple will, because the documents are more detailed and assets must be retitled. Whether that cost is worthwhile depends on the size and type of your property, your state's probate rules and your family's needs.

A trust also needs upkeep. When you buy a new home or open a new account, you need to decide whether it should be held in the trust.

A living trust is a flexible tool that lets you manage your property during life and pass it on privately and efficiently after death. It is not right for everyone, and it works only when it is properly set up and funded. If you are considering one, a licensed estate planning attorney in your state can explain the options and help you choose. Court Magazine explains the law in plain language so readers can understand their rights.