What Is A Living Trust And How Can It Help You?

When it comes to estate planning, having a living trust can help ensure that your assets go to the beneficiaries you want, and your loved ones are taken care of. Instead of having a will, a living trust can help you if you have a more complicated estate, like if you had several real estate properties.

Because estate planning is so crucial, you’ll want to understand what your options are before making a decision.

What Is A Living Trust?

A living trust is one type of estate planning tool you can establish during your lifetime. This legal document outlines the terms of your trust and any property you want to assign to it.

A living trust allows you, the grantor, to manage and distribute your assets both during and after your lifetime. A third party, called a trustee, manages your assets while you’re still alive, and then can distribute to your beneficiaries at the proper time. A living trust can also ensure that your beneficiaries receive your assets as quickly as possible without necessarily having to go through the probate process.

Types Of Living Trusts

The two main types of living trusts are irrevocable and revocable living trusts:

• Revocable living trust: This is the more common type of trust agreement where the grantor will maintain the ultimate control over the assets in the trust. The grantor can also name themselves as the trustee when it's created, and can add or remove assets, change beneficiaries, switch trustees, and even terminate the trust. While living, the grantor pays taxes on these assets. The point of this trust is to protect your assets in the event you're unable to control them or you fall ill — the trustee can make decisions on your behalf. Once the creator of the trust dies, then the trust becomes irrevocable.
• Irrevocable living trust: This type of trust is where the grantor creates the trust, but the trust owns the assets. The grantor isn't legally able to name themselves the trustee and essentially gives up some control over the trust since the trustee legally owns the trust. Once the legal document is set in place, with named beneficiaries and trustees, the creator or grantor won't be able to change it, though there may be some exceptions. For instance, if you want to remove any assets within the trust, you may have to go to the courts to seek approval. The main point of an irrevocable trust is to protect the assets and could lower estate taxes. Plus, it could shield the assets from being taken into consideration when it comes to eligibility criteria for Medicare, Medicaid, or other types of government programs.

How Does A Living Trust Work?

A living trust allows you to house certain assets and transfer them when the grantor passes away. To start, you'll need to create a trust to lay out the terms, such as what assets are housed within the trust, who the trustee is, and who your beneficiaries are.

The role of the trustee is to manage the assets and act as a fiduciary — this person or entity needs to manage the trust in the best interest of the beneficiaries. The grantor is the one who names the trustee. In most cases, grantors work with an experienced estate planning attorney to create a living trust to ensure that it is set up properly.

Once it's created, the grantor will have the list of assets they've chosen to go into the trust and will transfer the title of those assets to the living trust. The trust documents are also legally binding and in effect as soon as it is officiated. Once the grantor does this, then assets will be given to the beneficiaries according to the terms of the trust agreement, typically when the grantor passes away.

Types Of Assets In A Living Trust

Types of assets that a living trust can hold include:

• Bank accounts
• Real estate properties
• Stocks and bonds
• Digital assets (like your online business or NFTs)
• Tangible property such as heirlooms or jewelry
• Retirement accounts like IRAs and 401ks
• Life insurance policies

5 Benefits Of A Living Trust

There are some common benefits associated with using a living trust, including having more control over the distribution of assets and maintaining privacy. 

1. Avoiding Probate

Assets held in a living trust will be distributed to beneficiaries or held in an irrevocable trust without having to go through the probate process. That's where the courts may need to step in to determine whether an estate planning document is legally binding and interpret how assets need to be distributed. Since probate can be a time-consuming process, avoiding probate can ensure your beneficiaries will get their assets without having to jump through a lot of hoops.

2. Maintaining Privacy

Since assets that need to pass through probate become public record, having a living trust can keep your details private, such as the beneficiaries and assets that are passed on.

3. Provisions For Minors And Dependents With Specific Needs

Living trusts can help minors and dependents. Since they’re not able to handle the assets themselves, the grantor can name a trustee who can act in the best interests of the minor until they reach 18 years of age (or the age of majority in their state). For example, if you have a special needs sibling and you want to pass on assets to help for their care, creating a living trust ensures that the trustees will use the cash to pay for their long-term care.

4. Allowing A Contingency For A Grantor’s Disability

A living trust can allow the grantor to name a successor trustee or co-trustee if the original grantor is no longer able to care for the assets, or is incapacitated. For instance, if you’ve suffered a stroke and need around the clock medical care, you may not be able to handle your own finances. In this case, the successor (typically a spouse or domestic partner) will be able to handle the trust for you.

5. Flexibility

A living trust allows you to adapt to any changing financial or personal situations you face throughout your lifetime. For instance, if you get a divorce and have to give up or divide your assets, you can update these changes in your trust. Same goes for changing any beneficiaries you’ve previously named.

4 Things A Living Trust Can’t Do

Although living trusts can be a useful estate planning tool, there are some limitations with this type of legal documentation.

1. Avoid Estate Taxes

When assets are passed on to the beneficiaries after the grantor’s death, they may be responsible for estate taxes, though the amount could be reduced depending on how the assets are handled. There may also be ways to minimize federal estate taxes if what the beneficiaries inherit is lower than a certain threshold.

2. Provide Savings On Short-Term Legal Costs

Living trusts aren’t a short-term way to save money on legal costs because you will most likely need to pay for legal advice to ensure you’re setting up your living trust properly. In many cases, people hire legal help to create and make living trusts legally binding, which means you’ll incur attorney fees.

3. Protect Assets From Nursing Home Costs

A living trust won’t protect your assets from nursing home costs. Meaning, if you need to pay out of pocket for long-term care, your trustee could decide that your assets need to be used (assuming you’re deemed incapacitated). Even if you qualify for Medicaid, in most cases it won't pay for room and board (only the medical portion of your care). 

4. Handle All The Hard Decisions

Although it will ultimately benefit you in the end, it can be hard to go through the decision-making process when it comes to creating a living trust. It means having to go through all your assets and determine what you want in the trust. Plus, it can get emotional thinking about who you want to name as your beneficiaries and trustees. Especially for the latter, you’d want to make sure you name someone who you trust to handle your assets in a responsible manner.

Cost To Set Up A Revocable Living Trust

The cost of creating and setting up a revocable trust will depend on where you live, whether you do it yourself, and the attorney you hire. In most cases, you can look to spend anywhere from $1,000 to $3,000 or more. Costs will vary depending on if you're creating one with your spouse, if you have a lot of assets, and how complex your trust needs to be.

The Differences Between A Living Trust And A Will

A living trust allows you to name beneficiaries much like you would a will. Both are legal documents that also let you designate who will get your assets after you pass away. However, a will only refers to how assets are distributed after you pass away, and you won't be able to avoid probate court like you would with assets in a living trust. Plus, a last will and testament can name guardians for minors or dependents and other directives such as funeral arrangements, whereas a living trust will not.

How To Set Up A Living Trust

Here are the typical steps you take to create a living trust:

1. Decide on the type of trust you want to create.
2. Designate your beneficiaries, the assets you want to house in the trust and how much goes to each beneficiary.
3. Name a trustee and speak to them to determine whether they'll agree to administer your trust if you die or become incapacitated.
4. Create the living trust document, either by yourself or with the help of an estate planning lawyer. Once the document is finalized, then you can sign it (potentially in front of a notary public).
5. Fund your trust with the named assets.

Living Trust FAQs

Since living trusts can be complicated estate planning documents, we’ll break down some of the most commonly asked questions.

What is the downside to a living trust?

The downside to a living trust is that it can’t be used a sole estate planning document. If you want to name guardians for minors after you die or have other requests such as funeral arrangements, you’ll need other documentation.

What are the requirements for a living trust?

You need to name a trustee, beneficiaries, the types of assets to put into the trust, and how you want them distributed after you die. You will also need to write the trust document (with the help of an estate planning attorney) and sign it so it becomes legally binding.

What is the point of a living trust?

The point of a living trust is to help ensure that your assets don’t have to go through probate before being passed onto your beneficiaries.

How can I avoid probate?

Aside from creating a living trust, you can avoid probate by gifting your assets, having payable on death designations on your deposit accounts, and creating joint accounts or joint ownership for physical assets.

Is a living will the same as a living trust?

A living trust outlines the assets you want to transfer to appropriate beneficiaries. A living will, on the other hand, is a legal document outlining any medical treatments that you want or don't want to ensure you're alive. It could also outline other decisions such as organ donation or the types of pain management you want.

The Bottom Line: A Living Trust Can Allow Your Beneficiaries To Get Your Assets Faster

A living trust is an important part of estate planning in order for you to control your assets and to protect loved ones from having to go through the probate process. Although it doesn't cover all aspects of estate planning, a living trust can be a useful part of your overall planning. Although it does cost money to set one up, the fees you pay can be worth your peace of mind.

Another aspect of sound financial planning involves tracking your current income and spending. Consider downloading the Rocket Money℠ app to help you do so — it’s free.