A living trust is a legal document that places your assets — such as your home, bank accounts, and investments — into a trust during your lifetime. You maintain full control of those assets while you are alive, and when you die they pass directly to your chosen beneficiaries without going through probate court.
How a living trust works
When you create a living trust you become both the trustee and the beneficiary during your lifetime. This means you continue to manage and use your assets exactly as you did before. You can buy and sell property, move money in and out of accounts, and change the terms of the trust at any time.
You also name a successor trustee — the person who takes over management of the trust when you die or become incapacitated. At that point the successor trustee distributes your assets to your beneficiaries according to the trust’s instructions, without any court involvement.
Living trust vs will — what is the difference
Both a living trust and a will direct how your assets are distributed after death, but they work very differently:
- A will must go through probate court before assets can be distributed. A living trust bypasses probate entirely.
- A will becomes a public record during probate. A living trust remains private.
- A will only takes effect after death. A living trust can also protect you if you become incapacitated during your lifetime.
- A will is generally less expensive to create upfront. A living trust typically costs more to set up but can save money and time by avoiding probate.
What is probate and why does it matter
Probate is the court-supervised process of validating a will and overseeing the distribution of an estate. It can take anywhere from several months to over a year and often involves legal fees and court costs. In some states probate is relatively simple, but in others — such as California — it can be lengthy and expensive. A living trust allows your family to skip this process entirely.
Types of living trusts
There are two main types of living trusts:
- Revocable living trust — the most common type. You can change or cancel it at any time during your lifetime. It does not protect assets from creditors but does avoid probate.
- Irrevocable living trust — once created it generally cannot be changed or canceled. Assets placed in an irrevocable trust are no longer considered part of your estate, which can provide protection from creditors and may have tax benefits.
Most people who create a living trust choose the revocable type because of its flexibility.
What assets can go into a living trust
Almost any asset can be placed into a living trust including:
- Real estate and property
- Bank and investment accounts
- Stocks and bonds
- Business interests
- Personal property such as jewelry, artwork, and vehicles
To be protected by the trust an asset must be formally transferred into it — a process called funding the trust. An unfunded trust provides no benefit, so this step is critical.
What a living trust cannot do
A living trust cannot name a guardian for minor children — a will is required for that. It also does not replace the need for a will entirely. Most people with a living trust also have what is called a pour-over will, which captures any assets that were not transferred into the trust and directs them into it upon death.
A revocable living trust also does not protect assets from creditors or reduce estate taxes on its own.
Who should consider a living trust
A living trust is worth considering for people who:
- Own real estate, especially in more than one state
- Want to keep their financial affairs private
- Want to avoid the cost and delay of probate
- Want to plan for the possibility of incapacity
- Have a blended family or complex family situation
Key terms to know
- Trustee — the person who manages the trust
- Successor trustee — the person who takes over when the original trustee dies or becomes incapacitated
- Beneficiary — the person or organization that receives assets from the trust
- Revocable — can be changed or canceled at any time
- Irrevocable — generally cannot be changed once created
- Funding the trust — the process of transferring assets into the trust
- Pour-over will — a will that directs any assets outside the trust into it upon death
Sources
- USA.gov — Estate Planning
- American Bar Association — Public Resources
- National Institute on Aging — Getting Your Affairs in Order
This article is for general informational purposes only and does not constitute legal advice. Laws vary by state. Consult a licensed attorney for guidance specific to your situation.