A living trust, usually drafted with your attorney, is a document that acts in some aspects like a will. You put assets into the living trust such as your house, stocks and bonds, and bank accounts then typically name yourself as trustee. In the capacity of trustee, you administer these assets while you live, and when you die, the assets pass to the beneficiaries you named in the trust, bypassing probate. In other words, you don't technically own the assets, as they are now owned by the living trust, but you retain full control over them. Most living trusts are revocable, which means you can change the terms at any point in your life, or you can dissolve the trust entirely. When you die, the trust becomes irrevocable and cannot be changed.
Probate is the process of proving a decedent's will in court. Probate laws vary by state, but generally, the probate court in the county where the decedent resided formally appoints the executor named in the will, who is responsible for estate administration. The executor controls all aspects of any property titled in the decedent's name. She must inventory all of the estate's assets, including the value of each asset at the time of death. Depending on the size of the estate and other variables, such as challenges by heirs or beneficiaries, the probate process can take a year or more before assets are distributed.
Before opening an estate account with a bank or other financial institution, the executor first must apply for a tax identification number for the estate from the Internal Revenue Service. The decedent's Social Security number cannot be used for the estate account. The executor must provide the financial institution with a certified copy of the death certificate and a certified copy of letters testamentary issued by the court – documents naming the executor as estate administrator. The executor must also ensure that the decedent's probate assets, such as bank and brokerage accounts, are re-titled "The Estate of ..." rather than left in the decedent's name until the assets are distributed to heirs and beneficiaries.
Living trusts bypass probate and allow more timely distribution of assets by the trust's executor, but there are certain disadvantages. The executor of an estate going through probate is under court supervision and must supply the probate court with regular accountings. The executor of a trust has much more leeway – but much less supervision – which can be problematic if the individual’s honesty comes into question. Additionally, even if you create a living trust, you still need a will. Any assets not held in the trust must be distributed in accordance with the will.