Living Trust: What Is a Living Trust + Do You Need One?

What will happen to your assets when you pass on? Who will be the recipient(s) of your possessions? Are there any contingencies for the inheritance tax of your assets? Who will manage their distribution? All of these questions and more are answered in what is known as a living trust. And if you or a family member has considerable assets, it may be a good idea to create a living trust.

What Is a Living Trust?

A living trust is a legally binding document that handles the management and distribution of your assets while you are alive and after you pass away. It allows you (as the grantor) to control who your assets will be managed by while living, known as a trustee, and who your assets will be dispersed to after you pass, known as beneficiaries. As with all trusts, a living trust is a separate legal entity that can give ownership of your wealth, assets, and belongings.

What can be included in a living trust?

• Real estate
• Bank accounts
• Vehicles
• Fine art
• Jewelry

It also may include virtual or intangible items of value, such as intellectual property or mining rights.

How a Living Trust Works + How To Set One Up

A living trust is aptly named, as it’s created while you are still alive. When you create a living trust, the grantor — you — assigns a specific person to be the manager of your trust and everything you contribute within it. This person is known as a trustee.

So how does it work? The grantor of a living trust assigns a trustee to manage their collection of assets such as land, vehicles, and etc contributed to the living trust. The trustee is a crucial part of the equation and is required to oversee the financial well-being of the trust and disperse the assets as guided after the grantor passes away.

To set up a living trust, there are a few questions you first need to ask:

• What type of trust will you establish: revocable or irrevocable?
• What assets will you put into the trust?
• Who will be your trustee and handle the trust’s affairs?

Next, you will begin the process of setting up the trust, which will look something like this:

1. Work with an attorney to prepare the trust documents or prep them yourself if you require a simpler trust. Setting up a legal trust requires a significant amount of legal paperwork. To avoid any confusion or mistakes, consulting with a licensed attorney is a good starting point.
2. Get the documents notarized by a certified notary. You can most often find them at your local bank or insurance agency. It’s simply a way to verify the signature on an important document.
3. Get your title(s) transferred to your trustee as the holder of the trust. This is important because until you have them transferred, your assets are still able to go through probate court to be dispersed.

Living Trust Example

Say you own a fleet of luxury vehicles, which you would like to put in a living trust. Upon doing so, the fleet of luxury vehicles is now owned by or in the name of the trust. Along with transferring ownership, you’ve named your son as the trustee of your living trust. In your living trust, you’ve also outlined who will own each vehicle upon your passing, and whether there are any conditions that must be met before the ownership of the vehicles is transferred out of the trust’s possession.

When you pass away, your son will manage the distribution of your luxury vehicles to each beneficiary, according to the terms specified in the living trust.

Will vs. Living Trust

A will and a living trust are like taking a train versus a plane — both get you to your destination, just with different routes and scenery. They are two separate entities and, therefore, it is important to have both. Here are the differences:

Types of Living Trusts

Living trusts generally fall into two categories: revocable or irrevocable. The main difference lies within the terms of the trust, and whether they can be changed at any time.

Revocable Trust

A revocable living trust is one in which the terms of the trust may be changed by the grantor at any time. A grantor can add or remove beneficiaries, change the trustee, modify the terms of the trust, or even cancel the trust altogether. A revocable trust does not reduce your taxable estate.

Irrevocable Trust

An irrevocable trust is set in stone. It cannot be modified or canceled once it is created. An irrevocable trust reduces the taxes of your estate, as the assets are transferred permanently out of your ownership as soon as the document is signed.

Special Types of Living Trusts

There are a few types of living trusts designed for specific circumstances, such as:

• A special needs trust addresses issues that may be faced by beneficiaries who receive Social Security benefits, so as to not affect their eligibility for benefits or supplemental income.
• An irrevocable life insurance trust is created to own the grantor’s life insurance policy.

Advantages of a Living Trust

Regardless of the type of trust you choose, there are some benefits to having one:

• Avoids the probate process: The primary purpose of a living trust is to avoid the probate process when the grantor passes on. The probate process is the process through which a court verifies the legality of the distributions of a person’s possessions once they pass on.
• Saves money: Probate costs 5 percent to 10 percent of the value of your assets. For large estates, this could mean a significant chunk of change. In some cases, a living trust reduces the amount of your taxable estate, as the assets in a living trust are no longer owned by you, but by the trust.
• Protects your assets: A living trust offers much more protection than a will from the challenge of claims to a person’s estate. This is especially true with irrevocable trusts.

Disadvantages of a Living Trust

While there are some great pros to a living trust, it’s not always a positive outcome. There are a few downsides to managing your assets via a living trust:

• It can create extra complications in managing your belongings while you are alive: In the creation of a living trust, you transfer the ownership of your assets to the trust, and the management of your assets to the trustee. That means that if you wish to do anything with an asset that is in your trust, like selling one of your luxury vehicles, you will have to provide proof you are the grantor, which requires having specific documentation on top of your regular ID.
• You’ll need to go through the process of re-deeding or re-titling all of your assets to reflect ownership by the trust: This is extraordinarily important to make sure you do. Just creating a trust is not the end. If you do not move any of your assets into the trust, then the trust is pointless since it does not own any of the assets. Your estate planning attorney should help you and provide guidance on all the assets to re-title and rename under the trust. Some attorneys will file deeds for their clients, while others will not, so be sure to ask what you are responsible for.
• While living trusts can save you a considerable amount by avoiding probate down the line, they aren’t cheap to set up: A living trust is set up by an attorney, which can cost you a pretty penny. Any modifications down the line will need to go through an attorney, too.

The Bottom Line

So what is the best way to protect your assets in the event of an untimely passing? In a perfect world, all of your assets and belongings would go precisely where you want, but that’s not always the case. To ensure that your assets are sent exactly where they should go, a living trust is crucial to your peace of mind.

Financial planning, including protecting your finances, extends well into the future. Understanding what a living trust is and how to establish one can ensure your loved ones are taken care of and your assets are handled accordingly.

FAQs About Living Trusts

Here are some commonly asked questions about living trusts.