What Is a Living Trust?

How a living trust works

Regardless of how you establish your living trust, it begins with drafting the actual trust document. This outlines the terms of the trust, including how to handle your affairs, who will act as trustee, and who you name as beneficiaries. 

Your living trust holds the ownership rights or title to the assets (e.g., real estate, bank accounts, or investments) you transfer to it, a process known as “funding” the trust. This step is particularly important, as any assets that aren’t properly transferred to the trust may be subject to probate. 

Upon your death, your trustee will distribute these assets in accordance with the terms of your living trust. Keep in mind that these arrangements are typically permanent if you create an irrevocable living trust. 

In contrast, if you create a revocable living trust, you have full control over the assets held by the trust, just as you did prior to transferring them. For example, you can:

• Mortgage or refinance assets.
• Remove assets from the trust.
• Sell or give away any or all assets in the trust.

You are also free to terminate the trust completely at any time. And because you have full control over the terms of the trust, you can change the beneficiaries of the trust at any time, as well as the person you've designated as your trustee. Still, you should weigh the pros and cons of revocable and irrevocable trusts—ideally with an attorney—before deciding which one to create. 

The advantages of using a living trust

There are a number of advantages to using a living trust. They include.

Avoiding probate

This is often the main reason people use a living trust as part of their estate plan. The assets that are held by a living trust after your death can typically be distributed by your successor trustee more quickly than with a will. Because these assets are held by your trust rather than your estate, they do not have to go through the probate process as a last will does. Probate is a court-supervised process that can become complicated as well as time-consuming, and during this time, the assets undergoing probate will be inaccessible to any of your beneficiaries.

Providing for your loss of capacity

Your successor trustee will also be able to step in to handle and administer the assets held by the living trust in the event of your incapacity to deal with the assets yourself. So, for example, if you suffer from an accident that leaves you unable to manage the assets in the estate, the terms of your living trust allow your successor trustee to take over without having to apply to the courts for authority to do so.

Controlling the distribution of your property

Like a will, your living trust dictates what happens to your assets after your death. And you have more flexibility in distributing the property to your beneficiaries. For example, if one of your beneficiaries is a minor, you can set up a trust within your living trust for that beneficiary until they reach the age of majority or an age where you feel they'll be mature enough to handle their inheritance.

Keeping your affairs private

The probate process is an open process, which means it's a matter of public record. By keeping your assets in a living trust, you retain privacy for your family after your death. This means people can't search the public record to see what assets you owned at the time of death and how they were distributed among your beneficiaries.

The disadvantages of using a living trust

There are also a number of disadvantages to using a living trust. They include:

Transfer of title

While setting up the trust itself isn't particularly complex, any assets you want the trust to hold will need to be properly transferred to the trust. Assets that do not require a transfer of title—for example, furniture or jewelry—can usually be transferred using a document that assigns ownership rights. But for those assets to which you own the title, such as real estate, a legal change of the ownership of title must be made to the title document itself. This requires extra upfront paperwork as well as ongoing maintenance since assets change over time. 

Costs

The transfer of title process requires additional paperwork and the payment of filing fees to register the changes with the proper authorities. And if you're dealing with multiple title changes or more complicated assets, it’s especially advisable to consult with an experienced estate planning attorney to transfer title for you. These fees are all additional costs that are separate from the cost of creating the living trust itself.

No real tax advantages (for revocable trusts)

Even though a living trust owns the property you transfer to it, you will continue to be taxed personally on the income generated by these assets if it’s revocable. And while there can be some estate tax and income tax benefits of a living trust after you pass away, depending on how it is drafted, the benefits could also be achieved by a will.

How to set up a living trust

If you’re ready to move forward, you can follow these steps to set up your living trust.  

1. Talk to an estate planning attorney

While not technically necessary, you should consider hiring an attorney to create your living trust. Most importantly, they can spot potential issues unique to your situation, suggest solutions, and ensure your trust aligns with state laws. They can also assist with other estate planning needs, from drafting a power of attorney to appointing your healthcare agent.

If you’re on the fence, you might reach out to a few local estate planning attorneys, as many offer free or discounted initial consultations to discuss their services. 

2. Gather information

Whether you move forward with an attorney or go the DIY route, you’ll need to take stock of your assets and financial affairs. First, you should make a list of your property, including the following: 

• Real estate
• Vehicles
• Bank accounts
• Investments and retirement accounts
• Valuable personal items 

You’ll then need to gather important documents proving ownership, such as property deeds, vehicle titles, and account statements. At this point, you can write out your goals for how you want these assets to be distributed and to whom. 

3. Choose a trustee and name beneficiaries

For a revocable trust, you can name yourself as the initial trustee. With an irrevocable trust, you’ll typically need to appoint someone else. Either way, you’ll designate a trustee who will ultimately manage the trust when you’re no longer able to do so. 

As a result, you should pick someone who you trust and believe will truly act on behalf of your wishes. Family members or close friends are common choices, or you can appoint a third party—such as a corporate trustee or an independent professional fiduciary—as your trustee. 

Next, identify your beneficiaries—the individuals or organizations who will receive your assets. Be specific in naming beneficiaries and consider contingencies, such as what happens if a beneficiary passes away before you. 

4. Create the trust document

If you work with an attorney, they’ll draft your trust document based on your instructions. If you’re going the DIY route, you can use online templates or software, but be sure they comply with your state’s laws. 

Broadly speaking, you’ll include information about you (the grantor), the trustee, beneficiary designations, and specific instructions for asset distributions. 

If you’d like to start your living trust, connect with LegalZoom’s estate plan service.

5. Execute your trust documents

Once you or your attorney prepares the trust document, it must be properly executed to become legally binding. Typically, this involves signing the document in the presence of a notary public, though some states may require additional witnesses. Improper execution can render your trust invalid, so it’s crucial to follow your state’s requirements if you’re doing it yourself. 

6. Place assets in the trust

Lastly, you can transfer ownership of your assets and officially fund the trust. This might involve:

• Retitling your house deed to the trust’s name 
• Changing account titles for bank accounts and investments
• Updating beneficiary designations on life insurance policies, depending on your assets

Once complete, keep detailed records of all transfers and make copies of the new documents. 

Living trust vs. will

The following are ways in which wills differ from living trusts:

• Wills don't come into effect until after your death, so they cannot be used to manage your assets prior to your death.
• Wills must go through the public probate process before the distribution of assets covered by the will can be made.
• Because wills need to go through probate, the will itself becomes a matter of public record.
• Your will is usually the appropriate place to designate a guardian for any minor children.

It's recommended that you still have a pour-over will to complement your living trust. A pour-over will exists to transfer any assets that aren't part of your trust to your trust when you die. People often create a pour-over will and a living trust together. A last will can be used in conjunction with a living trust to name guardians for minors and express final wishes not otherwise captured in a living trust. 

A living trust may be the ideal tool for your estate plan. However, there are distinct pros and cons of using a living trust which warrant careful consideration of whether a living trust is the right estate planning tool for your specific needs.

How LegalZoom can help with a living trust

A living trust can be used to transfer property and assets to beneficiaries without going through the probate process. This can save months of time and thousands in fees, depending on your state and some other factors. Also, it keeps your estate private, whereas a last will, once probated, will become public record.

Whether you choose to create a living trust, a last will, or both, we offer attorney-backed estate planning packages to guide you through the process. Or, we can help you connect with an experienced estate planning attorney who can offer personalized advice for you and your family. 

FAQs

What types of assets can be placed in a living trust?

A living trust can hold real estate, bank accounts, investments, vehicles, and other significant types of property. Some assets, like retirement accounts and life insurance policies, typically remain outside the trust but can name the trust as beneficiary. 

Do I need a living trust?

A living trust may be beneficial if you have substantial assets or a complex estate, as it typically bypasses the probate court process. Living trusts can also make it easier for those who own property in multiple states. However, you should consult an attorney for specific advice. 

Does a living trust have tax benefits or save estate taxes?

Revocable living trusts generally don’t provide tax benefits during your lifetime since you’re still the owner of the assets (and thus responsible for any tax burdens), but you can draft them in a way to save on estate taxes and income taxes for your family after you pass away. Conversely, irrevocable trusts may offer tax advantages since you transfer ownership to the trust. Living trusts above the IRS thresholds are also subject to federal estate taxes.

Why use a trust instead of a will?

A trust offers several advantages over a will. It can help avoid probate, protect assets, and make it easier to manage your personal property if you become incapacitated.

Belle Wong, J.D., contributed to this article.