What Is a Living Trust?
A living trust is a legal arrangement you create during your lifetime to hold and manage assets according to your instructions. It's commonly used as part of estate planning to organize property, plan for the possibility of incapacity, and determine how assets should be handled after death.
One reason living trusts appeal to people is that you can often create a revocable living trust, serve as its trustee, and continue managing your assets much as you do now. You establish instructions for how the trust should operate, including who takes over if you can no longer manage it and who receives the assets after you die.
A living trust isn't necessary for everyone, but it can be useful if you want more control over how certain assets are managed and distributed.
How Does a Living Trust Work?
With a typical revocable living trust, you create the trust and transfer selected assets into it. You can usually act as the trustee, which means you continue managing those assets according to the trust's terms.
For example, imagine you own a home, have savings, and want your two children to inherit your assets eventually. You could create a living trust, transfer appropriate assets into it, and name yourself as the initial trustee. You could continue managing the trust while you're able to do so, while the document explains what should happen if you become incapacitated or die.
You would also name a successor trustee. This is the person or institution that can step in when the trust's terms allow, such as if you become unable to manage your affairs or after your death. The successor trustee then follows the instructions in the trust document, which may include managing property, paying appropriate expenses, and distributing assets to beneficiaries.
You can generally change or cancel a revocable living trust while you have the legal capacity to do so, subject to its terms and applicable law. That flexibility is one reason people choose this type of trust.
What Does a Living Trust Help With?
A living trust can serve several purposes, depending on how it's written and which assets are transferred into it.
Managing assets if you become incapacitated: If you can no longer manage your financial affairs, a successor trustee may be able to take over management of trust assets without requiring a separate court-appointed property manager for those assets. The trust doesn't automatically give the successor trustee authority over property that was never placed in the trust.
Passing certain assets to beneficiaries: Assets properly held in a living trust can generally be distributed according to the trust's instructions after your death. This can make the process more direct for those assets.
Potentially avoiding probate: Assets properly transferred to a living trust generally don't need to go through probate just to pass under the trust's terms. This can reduce some of the paperwork, delay, and expense associated with settling an estate. It doesn't mean every asset you own will automatically avoid probate.
Keeping certain details private: Unlike a will that goes through probate, a living trust generally isn't filed with the court simply because you die. This can provide more privacy about the assets and distributions handled through the trust, although other records may still become public and trust-related disputes can lead to court proceedings.
A living trust doesn't eliminate every estate-planning concern. You'll still need to consider debts, taxes where applicable, beneficiary designations, and other documents that address matters outside the trust.
What Does It Mean to Fund a Living Trust?
Funding the trust means transferring ownership of selected assets into the trust or taking the appropriate steps to make them part of it. Creating the trust document is only the first step; the assets must also be handled correctly.
For example, if you want your home to be owned by your living trust, you'll typically need to prepare and record a new deed transferring ownership from you individually to you as trustee of the trust. The deed must use appropriate legal wording, and the process depends on your state and how the property is currently owned.
Before transferring a home, check whether the change could affect your mortgage, homeowner's insurance, property taxes, or homestead protections. The rules vary by state, so it's worth consulting an estate-planning attorney before changing the deed.
Other assets may require different steps:
Bank accounts: You may need to change the account's ownership to the trust or open a trust-owned account, depending on the bank and your plan.
Non-retirement investments: Brokerage accounts and certain investments may need to be retitled in the trust's name.
Personal belongings: Furniture, jewelry, collectibles, and other property may be transferred through an assignment or other appropriate documentation.
Vehicles: State rules vary, and transferring a vehicle into a trust isn't always necessary or advisable.
Retirement accounts and life insurance: These require special care. Retirement accounts generally shouldn't be retitled into a living trust, and naming a trust as a beneficiary can have tax and distribution consequences. Review beneficiary designations with a qualified professional before making changes.
Not every asset needs to be placed in a living trust. The goal is to identify which assets belong in the arrangement and complete the necessary steps for each one. An asset that you intended to transfer but never properly transferred may not receive the benefits you expected.
Is a Living Trust Better Than a Will?
A living trust and a will serve different purposes, so one isn't automatically better than the other. Many people use both.
A will explains how certain property should be distributed after death, names an executor, and can nominate a guardian for minor children. A living trust governs the assets placed into it and explains how those assets should be managed and distributed under its terms.
Some people who create living trusts also prepare a pour-over will. This type of will directs certain assets left outside the trust into it after death. However, those assets may still need to go through probate before they can be transferred.
A living trust also doesn't replace a financial Power of Attorney or healthcare planning documents. A Power of Attorney can authorize someone to handle certain matters on your behalf, while healthcare documents address medical decisions and your treatment preferences. These documents work together to cover different situations.
How Do You Set Up a Living Trust?
Setting up a living trust involves more than signing a document. You'll need to decide what you want the trust to accomplish, choose the people involved, and make sure the assets are handled properly.
Start by identifying your goals. You may want to make it easier for someone to manage your assets if you become incapacitated, provide instructions for how your property should be distributed, or help certain assets pass outside probate.
Next, decide who will serve as trustee and successor trustee. Choose people who are dependable, capable of handling financial responsibilities, and willing to serve. You'll also identify your beneficiaries and explain how and when they should receive assets.
The trust document should reflect your wishes and comply with the laws that apply to you. Because transferring property and setting trust terms can have legal and financial consequences, working with an estate-planning attorney is often worthwhile. Once the document is established, follow through with funding the trust and reviewing your other estate-planning documents so they work together.
Final Thoughts
A living trust can be a useful way to organize your assets, plan for possible incapacity, and provide instructions for what happens to certain property after your death. Whether it's right for you depends on your goals, the assets you own, your family circumstances, and the costs involved.
The most important thing to remember is that creating the trust is only part of the process. It also needs to be properly funded and reviewed as your circumstances change. An estate-planning professional can help you determine whether a living trust makes sense for your situation and how to establish it correctly.
Up Next: A living trust helps you plan for the management of your assets, but it doesn't explain what medical care you want if you're unable to communicate your wishes. That's where a living will comes in.
In the next article, we'll explain what a living will covers, when it may be used, and how it fits into planning for future healthcare decisions.
Pardon our ads, they allow us to keep our site running and keep our helpful content free to access.
Comments