What Is a Living Trust and How Does It Work?

A living trust is a trust fund and legal document that secures your assets for a beneficiary until a certain time, such as when you pass away, when the beneficiary reaches a certain age, or another circumstance specific to your needs. You should consider putting a living trust on your estate planning checklist.

There are a few key terms to know ahead of diving into the specifics:

Grantor: the person establishing the living trust (that’s you), also sometimes called a trustor

Trustee: the person assigned to manage the trust once it’s created and who distributes the assets later on

Beneficiary: the person receiving the assets in the trust at the predetermined time

Most trusts are living trusts, or trusts that are created while the grantor is still alive, as part of their estate plan. The assets can be distributed after your death or during your lifetime. Living trusts allow you to bypass probate court processes associated with wills or intestate estates, which can save you time, stress, and money spent on legal fees.

How does a living trust work?

Living trusts can be an essential part of a robust estate plan. They allow you to safeguard your assets so they can be managed and distributed when and how you’d like.¹

Depending on the type of living trust you have — revocable or irrevocable (see below for more on these) — you can manage and change the trust yourself if you designate yourself as the trustee during your lifetime (you can also designate someone else as the trustee while you are alive), or the trust will be managed by the trustee you appoint upon your death.¹

With a revocable trust, you can name a trustee to manage the assets and property in the trust should you become sick or incapacitated.¹ With an irrevocable trust, the terms cannot be changed, and the trustee will distribute the assets according to your wishes once you pass.

Here are the general steps to consider when creating a living trust:

• Determine whether you’d like to remain in control of the account or if you’d like to have another party, like an estate planning lawyer, manage it for you as your trustee.
• Assign a single beneficiary designation, such as your surviving spouse or family member, or multiple beneficiaries, who will receive your assets at a preplanned time.
• Open a trust account and transfer money or property into it. At the time you’ve chosen, whether it’s at your death or sometime before, the trustee will distribute these assets to your beneficiaries.

What should you put in a living trust?

While living trusts can hold any number of assets, some are more appropriate for funding your trust than others:

• Financial accounts like cash and bank accounts
• Investment accounts that are not part of your retirement plan
• Stocks and bond certificates
• Personal property, like jewelry, electronics, artwork, collectibles, and others
• Vehicles, pets, livestock, and farm equipment
• Businesses or organizations
• Land or real estate

Some things are not allowed to be transferred from person to person without going through the formal probate process. Check with your state’s guidelines to make sure your trust assets meet regulations.

What should you not put in a living trust?

Though there are many items you can include in your living trust account, some are not allowed or you may wish to avoid:

• Retirement accounts, like IRAs, 401(k)s, 403(b)s, and annuities
• Money from HSAs, MSAs, or FSAs

How much does a living trust cost?

According to AARP, it can cost upwards of $1,500 to hire an estate planning lawyer to help create a living trust document, with that cost varying by lawyer and state. If you have access to a network of attorneys through a legal plan offered by your employer, then you can maybe be able avoid some or all of these fees.

Types of living trusts

Living trusts typically take one of two forms: revocable living trusts and irrevocable living trusts.

Revocable living trust

A revocable living trust allows the grantor to designate themself as the trustee, giving them full control of the assets being kept within their revocable trust. What makes revocable living trusts appealing is the flexibility they offer. The grantor can cancel or amend this type of trust.

Irrevocable living trust

With an irrevocable living trust, the grantor names an outside trustee to control the account, as opposed to naming themselves. This type of trust is different from a revocable trust in that once the account is handed over to the trustee, the grantor is no longer the legal owner of the trust or its assets. Once created, the grantor cannot change or cancel irrevocable living trusts.

Here's a quick breakdown of the differences between a revocable and an irrevocable trust:²

Creating a living trust

You can create a trust in one of two ways: You can do it yourself, or you can hire an estate planning attorney to facilitate the process for you.

Because hiring a lawyer is such an important decision, you’ll want to make sure you utilize someone you can trust for legal advice. Look to your immediate circle for recommendations or, if you have access to legal insurance plans through your job, find a lawyer within that network.

Here’s a general checklist for creating a living trust, whether it’s revocable or irrevocable. You’ll want to research lawyers who can help you if you plan to work with one:⁴

1. Decide what assets or property you want to leave in the trust.
2. Think about whom you want to inherit what’s in your trust. These beneficiaries could be family members, friends, charities, etc.
3. For an irrevocable trust, pick a trustee who will manage the trust when you have passed and make sure the beneficiaries receive the assets. For a revocable trust, you could manage it yourself and appoint a successor trustee for when you pass.
4. Consider appointing an adult to manage any trust inheritance that will go to a minor.
5. Create your trust document, either yourself or with a lawyer’s help.
6. Sign your trust document and have it notarized. Be sure to check your state’s requirements.
7. Transfer assets and property titles to the trust.
8. While you don’t need to file the trust document with a government agency, keep it in a safe place, and let the trustee or successor trustee know where to find it.

Tax implications of living trusts

Taxes for revocable and irrevocable trusts differ. Here’s a look:⁵

Taxes for revocable trusts

In this type of trust, any income from the trust is taxable as income on the creator or grantor’s tax return. Why? Because the grantor has full control of the trust while they are alive. The trust uses the grantor’s social security number as its tax ID, so as far as the IRS is concerned, any income from the trust is simply the grantor’s income.

Taxes for irrevocable trusts

Unlike with a revocable trust, which still belongs to the grantor, an irrevocable trust is an entity of its own, and has its own tax ID number. As such, income must be reported for the trust itself.

Living trusts and probate

What type of trust you create, whether you have a revocable or irrevocable living trust, both avoid probate, or the legal process in which a court oversees the management and distribution of assets once a person passes. Typically, assets you have outlined in a will have to go through probate, but putting assets in a living trust typically sidesteps that.⁶

Keep in mind, however, that certain types of assets can be passed on without having to create a trust or go through probate. Some examples are:⁶

• Life insurance with designated beneficiaries
• Retirement accounts with designated beneficiaries
• Real estate held jointly with a right of survivorship
• Bank accounts held jointly with a right of survivorship
• Brokerage accounts held jointly with a right of survivorship

Living trust vs. will

Living trusts and wills are both options when planning your estate. Each helps you plan for the storing and managing of your tangible assets. However, the way assets are held and distributed differs between the two.

A living trust keeps those assets in an account and can be directly dispersed to your beneficiaries by your trustee. Most wills have to go through probate, or the formal process of distributing assets, which often requires you to go through probate court.

Here’s a look at the pros and cons of each:³

Living trust

Pros:

• Allows you to designate a trustee to manage the assets you put in the trust should you be unable to do so
• If it’s an irrevocable trust, the assets are protected from estate taxes and from creditors.
• Avoid probate, and the terms of your trust are kept private.

Cons:

• Usually requires paying a lawyer to set it up
• If it’s an irrevocable trust, you can’t change it after it’s created.
• If it’s a revocable trust, you still pay estate taxes.

Will

Pros:

• Can be as detailed as you want in terms of how you want your assets distributed when you pass
• You can create one on your own using online services or free templates from your state, if they are available.
• You can amend or create a new will any time.

Cons:

• Goes through probate, which can be a lengthy process
• Does not maintain privacy, as the will is public record
• Does not avoid estate taxes
• Assets are not protected from creditors

Creating a living trust can be a part of your estate plan by helping you manage and distribute your assets and property the way you want. Whether a revocable or irrevocable trust makes the most sense for you depends on your goals for your estate. Both avoid the probate process when you pass, however they are taxed differently. For more complicated trusts, enlisting the help of a lawyer can be crucial to make sure the trust is valid.