What does a living trust do?

A living trust is an estate planning tool that bypasses probate, the state court process for wrapping up a person's estate after they pass away. Compared to a will, a living trust can often get inheritances to your beneficiaries more quickly and with less hassle.

What is a living trust?

A living trust holds your assets during your lifetime and allows them to be distributed to the people you choose upon your death. To more easily understand how a living trust works, think of a trust as an empty box. You can put your assets into this box, including financial accounts and real estate. During your lifetime, you have control over the box, and you can use, sell, or spend the items in it.

Upon your passing, the person you've named as successor trustee takes the box and begins carrying out the instructions in your trust document. This includes distributing the contents of the box to the beneficiaries you've chosen.

What is a living trust used for?

Like a will, a living trust is a way of bequeathing money and property to the people you choose. Here are some reasons you might want a living trust instead of just a will:

• Getting inheritances distributed more quickly. Property that passes through a will can't be distributed to heirs until the will has been through probate—a court-supervised procedure for winding up your affairs. Depending on where you live and your estate's size, probate can be a long and expensive process. In contrast, assets in a living trust don't go through probate and can be passed on to beneficiaries much more quickly.
• Avoiding probate in multiple states. If you own vacation homes or other property in multiple states, a living trust can avoid the expense and hassle of having a separate probate proceeding in each state where you own property.
• Privacy. Probate is a public court proceeding. Trusts are private documents.
• Planning for incapacity. If you lose your mental capacity, the successor trustee can step in and manage the assets in the trust for you. As a practical matter, the authority granted to a trustee may be more readily accepted by outsiders than a standard power of attorney.

A living trust is usually accompanied by a "pour-over will" that addresses any probate assets that weren't included in the trust.

Limitations of a living trust

It's also useful to understand what a trust doesn't do. A revocable living trust doesn't avoid taxes. However, estates of up to $11.7 million per person are exempt from federal estate taxes as of 2021. Smaller estates can be subject to state estate taxes, depending on the state.

A revocable living trust also doesn't protect your assets if you need to apply for Medicaid benefits for long-term care. If that's your goal, you'll need a different type of trust. An estate planning or elder law attorney can help you.

Finally, you may not need a living trust if almost all of your assets are exempt from probate anyway. Many assets with designated beneficiaries—such as life insurance policies, retirement accounts, and pensions—go directly to your beneficiaries upon your passing without going through probate.

Creating and funding a living trust

The document that establishes your living trust is called a living trust agreement. The agreement names a trustee (usually you) to manage the trust and a successor trustee who will serve if you become unable to. It also identifies the trust's beneficiaries and describes the living trust rules. The trust agreement must be signed according to your state's laws. Trusts can be complex, so it's best to get legal help rather than write a trust yourself.

Because the purpose of a living trust is mainly to protect assets from probate and get them distributed to beneficiaries more quickly, the trust is only useful if you put money and property into it. You'll need to change legal ownership on all the property you want to place in the trust, including personal and real property and financial accounts.

Trusts are more complicated than wills, and they may cost a little more to set up. But you'll save on probate court fees. And once your living trust is established, you'll have the peace of mind of knowing you have a solid estate plan in place.