A living trust, sometimes called an inter vivos trust, is a legal document that changes ownership of your property during your lifetime. The trust is created as part of the estate-planning process, in which you, the grantor, transfer ownership of property into the trust during your lifetime. The trust then legally owns the property until your death, when the property then transfers to the people you have chosen as beneficiaries. Living trusts are popular because they create an alternative to the traditional will and probate process.
Living Trust Basics
The person creating the trust is called the grantor or settlor. The grantor transfers property into the trust, creates its terms, and names a trustee, who is responsible for managing the trust during the grantor's lifetime and for distributing the property after the grantor dies. The grantor can name himself as the trustee in a living trust, in which case a successor trustee is also named should the main trustee pass away or be unable to serve. The beneficiaries are the people the trust assets are distributed to after the death of the settlor.
Revocable vs. Irrevocable
Most living trusts are revocable, which means the settlor can make changes to the trust during his lifetime. He can take property out of the trust, add property to it, change the trustee or beneficiaries, or even delete the entire trust. Because the trust is revocable and the grantor controls the assets during his lifetime, the trust assets are subject to estate taxes and Medicaid spend-down. A living trust can be designed to be irrevocable, in which case it would avoid estate taxes and, once it is in place for five years, Medicaid spend-down.
Benefits of Living Trusts
Living trusts provide many benefits, including:
Avoiding probate. The biggest benefit of living trusts is that they allow you to bypass probate, the process that approves and enacts the provisions of a will. The probate process can take months and involves the cost of an executor, attorney, and court fees. Assets cannot be distributed to heirs until probate concludes.
A living trust, on the other hand, only involves the cost of setting up the trust and the work of the trustee. There is no waiting period at all to distribute assets after your death—assets can be distributed at any time you choose. A living trust also allows you to avoid having multiple probate proceedings in multiple states, if you own property in more than one state.
Flexibility. A living trust can be amended during your lifetime. You can change your mind about anything—nothing is set in stone.
Distribution on your terms. When your assets pass through a will, they can't be distributed until probate concludes, at which point they are distributed all at once. (An exception is when you've set up a trust in your will, called a testamentary trust.) With a living trust, you can choose exactly how your assets will be distributed, including setting distribution dates and imposing requirements, such as beneficiaries reaching a certain age or achieving milestones such as graduating from college.
No change in lifestyle. When you set up a living trust, you transfer ownership of your assets to the trust, but you still get to use them during your lifetime. That means you can live in your house, drive your car, and spend your money. The only difference is the house and car are now owned by the trust and your bank account will have the trust's name on it. You have complete control over how the assets are used during your lifetime, so you go on living as you normally would.
Protection for the future. A living trust offers the peace of mind that, should you become mentally incapacitated, your assets are controlled by the trust and managed by the trustee you have chosen, making a conservatorship proceeding unnecessary. A living trust does not completely shield your assets from creditors, but it can make the assets harder to locate, which can discourage creditors from coming after them.
Privacy. A living trust provides complete privacy about your assets and how they are distributed after your death. The probate process, in contrast, is public.
How to Set Up a Living Trust
To create a living trust, you need to create or have a trust document created for you. The document has to be signed in front of a notary to be valid, but it does not have to be filed with the state or registered in any way. For the trust to become effective, you have to transfer assets to it. The more assets you transfer, the more beneficial the trust is because it keeps those assets from facing probate.
Setting up a living trust can help you conveniently manage assets during your lifetime and control how they are distributed after death, making it an attractive option while also avoiding probate.
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.