What Is a Living Trust?

Trusts are an effective component of planning your estate and ensuring you protect your assets during and after your life. There are, however, many types you could use, each depending on your needs and goals. One of the most common you’ll see is a living trust.

In this article, we’ll explain what a living trust is and how it works. We’ll outline its distinction from an irrevocable trust and how it can fit into your estate plans. You’ll also learn about the advantages and disadvantages of setting one up.

How Living Trusts Work

A living, or revocable, trust is a legal arrangement that lets you place assets in the care of an individual or organization, known as a trustee, who will manage them. Then, when you determine, you can transfer the contents of the trust to a beneficiary, whether it’s your children, another relative, a friend, or, in some cases, yourself.

A living trust is the first of two primary types of trusts — revocable and irrevocable. “A living trust is changeable, meaning the person who sets it up can change or cancel it anytime,” says Mark Hirsch, personal injury lawyer and co-founder at Templer & Hirsch. “This differs from an irrevocable trust, which cannot be changed once set up,” he continues.

Because you’re able to change or revoke a living trust’s terms, a core benefit of it is that you gain the flexibility to modify your estate plan as circumstances in your life change. For instance, one of your beneficiaries may have passed away or has become incapable of receiving an inheritance. In this case, you can change the terms and assign a new beneficiary.

“When big things happen in a person’s life, like getting married, divorced, having a child, or getting a lot of new money, they might need to change or cancel their living trust,” Hirsch explains. “Writing up a trust agreement, putting assets into the trust, and choosing a trustee to run the trust are the steps needed to set up a living trust.”

Why Establish a Revocable Trust?

While planning your estate, you might choose to set up a living trust for various reasons. It can be an effective and, as noted, flexible tool to safeguard your wealth and be able to pass it on to beneficiaries. There are, however, other key benefits, such as the privacy it provides and bypassing probate court.

Flexibility

The most prominent benefit, of course, is the freedom to change the trust after it’s been established. This can be advantageous if you foresee situations shifting in your life, such as marriages ending, children becoming unable to manage or receive funds, and the death of beneficiaries. Even if you don’t think any of this might happen, it’s still important to plan for it.

“Although…conversations” surrounding estate planning, life changes, and death “can be difficult, addressing them now can save your family significant stress and expense in the future,” says Alexander M. Evans, estate planning attorney at Turke & Steil, LLP. “A revocable trust allows you to maintain control over your assets during your lifetime and offers the flexibility to make changes as your circumstances evolve.”

Avoidance of Probate

Setting up a living trust can enable you to keep your assets private by avoiding probate. This can be beneficial, especially because probate can be a drawn-out process with the potential to draw scrutiny from public agencies and can garner unwanted attention from people you don’t want to benefit from your estate.

Per Marissa Beyer, CFP, Senior Wealth Advisor and Partner at Fidato Wealth, “Assets that are placed into a trust do not require disclosure to anyone except for the named beneficiaries.” Therefore, by putting funds into a living trust, you can ensure that only the family or friends you want to receive an inheritance are the ones in the know.

Control Over Your Assets

When you allocate assets to a trust, you can ensure that your assets go directly to the people you want without passing through other channels. As mentioned above, assets within a revocable trust bypass probate; however, the creation of the trust is also beneficial in that it establishes a structure for your estate.

According to Ed Mahaffy, CFP, ChFC, president and Senior Portfolio Manager at ClientFirst Wealth Management, a living trust can “[prevent] the courts from controlling your assets during incapacity, and [give] you—as opposed to the court—control over the assets you leave to your minor children or grandchildren.”

Are There Any Disadvantages?

Living trusts have a clear set of benefits, granting you more control over the transfer of your assets. However, they also have some drawbacks to keep in mind that could affect whether you might choose to include them in an estate plan.

Subject to Estate Taxes

The first disadvantage of living trusts to consider is that they incur estate taxes, unlike their irrevocable counterparts. This is because, during your lifetime, you still have access to the funds, making them a measurable — and taxable — piece of your estate once you pass away.

Not Ideal for Asset Protection

Revocable trusts are also not beneficial for protecting your assets from litigators and creditors while you’re alive, as some trusts are. Like with estate taxes, this is because of the continued ability you have to amend or revoke the arrangement and access your funds.

Expensive Setup and Management

Another disadvantage of living trusts is their cost to establish and maintain, according to Evans. When you establish a trust, consider that you’ll need to pay a legal professional to draft the documents and, if applicable, a trustee to manage the assets.

“[Living trusts] can be more costly and complex to set up compared to a simple will,” he says. “In a trust-based plan, the idea is that you pay the majority of the expenses (in time and money) on the front hand rather than your beneficiaries paying those costs after you’re gone as they would with a will-based plan, or no plan at all.”

How to Set Up a Living Trust

Setting up a living trust is a straightforward process. Ultimately, you’ll need to seek an estate planning professional or financial advisor who can help you go through the proper establishment avenues.

“Finding a quality estate planning attorney is the first step,” Beyer recommends. “Creating a living trust is not a process you want to do on your own or use online templates to create as trust language should be specific and reflect a person/family’s wishes and using boiler plate templates and assumptions will not set up a trust in a way that produces the result most are looking to achieve.”

After meeting with an expert, you’ll be able to have a more comprehensive overview of what it would take to create a revocable trust and how you would go about forming it and placing assets within it.

Evans breaks down the process:

First, you will need to work with an estate planning attorney to draft the trust document according to your specific wishes and needs. During this step, you will designate a trustee to manage the trust (typically you during your lifetime for a living trust) and beneficiaries who will receive the assets upon your passing.

Once the trust is formed, you will then transfer ownership of your assets into the trust, which may involve retitling properties and accounts.

Frequently Asked Questions

What is the downside of a revocable trust?

The two most significant downsides to a living trust, aside from cost, are that it’s subject to estate taxes and its vulnerability to litigation and creditors. These are a consequence of it being an accessible asset during your lifetime. Even so, according to Beyer, “Any advantages of setting up a living trust far outweigh any drawbacks.”

What is the difference between an irrevocable and revocable trust?

A living (revocable) trust is one that you can amend or take back while you’re still alive. Therefore, it offers a heightened level of flexibility and control over your assets, allowing you to make changes to fit different conditions or mindsets. Conversely, an irrevocable trust is one that you can’t change once you establish it. Once you name beneficiaries and transfer assets, it’s locked in. A benefit of this is that since you can’t access it, it’s difficult for litigators or creditors to come after.

What is an example of when to amend a living trust?

Various changes in your life could be a reason to amend a revocable trust. However, per Mahaffy, a common one might be having children. He says, “An example of a situation that would require amending the living trust might be when, after you establish your living trust, you are blessed with children and need to amend the trust to set up a children’s trust within your living trust so when you die, your assets can be used for your children without court interference.”

When would someone revoke a living trust?

Unlike changes in a revocable trust, terminating it is an unlikelier, yet possible scenario. Beyer points out that “some trusts are set up for very specific purposes,” and that “in the event the primary purpose for the trust is no longer needed it would make sense to revoke the trust.”