Key takeaways

  1. A revocable trust (revocable living trust) can be modified or revoked during the lifetime of the grantor
  2. An irrevocable trust cannot be altered without the agreement of the beneficiaries or by court order
  3. A revocable trust becomes irrevocable upon the death of the grantor 
  4. Establishing a living trust involves inventorying assets, appointing trustees and successor trustees, and transferring assets into the trust
  5. Tips for choosing a living trust attorney include expertise, cost, communication style, background research, and reviews from friends/family

Are you seeking to protect your hard-earned assets and provide for your loved ones after your passing? A revocable living trust may be the solution for you.

In this post, we’ll explore the concept of living trusts, their benefits, and how they work, along with a comparison to wills to help you make an informed decision.

Understanding the concept of a living trust

A living trust is a legal arrangement that allows you to:

  • Transfer ownership of assets to a trustee
  • Manage assets for the benefit of named beneficiaries
  • Provide flexibility, privacy, and control over asset distribution
  • Minimize estate taxes
  • Avoid the lengthy and costly probate process

Revocable living trust definition

Types of living trusts

There are two main types of living trusts: revocable and irrevocable.

Revocable trusts

A revocable trust (revocable living trust) is a legal document that can be modified or revoked during the lifetime of the creator of the trust (grantor). Revocable living trusts provide flexibility, allowing the grantor to make alterations at their own volition.

Irrevocable trusts

An irrevocable trust is a legal document used to transfer assets from the grantor to the trustee on behalf of the beneficiaries. This type of trust cannot be altered without the agreement of the beneficiaries or by court order. The grantor no longer owns assets within irrevocable trusts, which means the grantor must relinquish all ownership rights.

It’s common for young people to favor revocable living trusts due to their flexibility, but it is important to note that a revocable trust becomes an irrevocable living trust when the grantor dies. 

This critical factor highlights the distinction between revocable and irrevocable trusts. In this context, understanding the differences between revocable trusts and other types of living trusts is crucial for effective estate planning.

The role of the trustee

A trustee’s key responsibilities are administering the assets in living trusts, managing financial affairs, adhering to the stipulations specified by the grantor, and ensuring the correct distribution to the beneficiaries. A trustee should possess the following competencies and qualities:

  • Tax and accounting knowledge
  • Organizational capabilities
  • Dependability
  • Sound discernment
  • Legal understanding
  • Accessibility

The legal liability of a trustee in a living trust is to exercise their fiduciary duty with due care and diligence. They are responsible for:

  • Safeguarding and distributing the trust’s assets according to the provisions set out by the trust’s creator
  • Acting in the best interests of the beneficiaries
  • Keeping accurate records of all transactions and activities related to the trust
  • Avoiding conflicts of interest
  • Making informed decisions and seeking professional advice when necessary

A trustee can also be a beneficiary, but it is best to consult an estate planning attorney before appointing one to avoid conflicts of interest.

The process of establishing a living trust

Establishing a living trust involves three key steps:

  • Inventorying assets
  • Appointing trustees and successor trustees
  • Transferring assets into the trust

This process ensures that all assets are suitably included in the trust, allowing for a seamless transfer of ownership and control to the trustee while addressing estate planning needs.

Inventorying assets

Creating a comprehensive list of all the assets that belong to the trust is the initial step in establishing a living trust. This inventory should include:

  • Property
  • Accounts
  • Safety deposit boxes
  • Storage units
  • Any other assets held by the trust

Inventorying assets ensures a precise comprehension of property and its value in one’s possession.

To create an asset inventory, one should review the trust instrument, compile a list of all the initial assets, and update periodically. Ensuring accuracy involves avoiding common errors such as inaccurately identifying trust assets, neglecting asset transfers to the trust, and omitting assets from the inventory. Paying attention to these aspects will help maintain precision.

Appointing trustees and successor trustees

Trustees and successor trustees should be appointed carefully to ensure the trust is managed according to the grantor’s wishes, even in the event of incapacity or death. Factors to consider when appointing a successor trustee include:

  • Trustworthiness and integrity
  • Capacity to follow instructions
  • Financial acumen
  • Communication and collaboration abilities
  • Familiarity with the trust terms
  • Long-term dedication

An institution or organization can also be appointed as a trustee or successor trustee, offering additional expertise and resources in managing the trust. Keep in mind that appointing a bank or trust company as the trustee may involve additional investment advisory and trustee fees.

Transferring assets into the trust

Transferring assets into the trust involves changing the ownership of the assets to the trust’s name, guaranteeing that they are properly managed and distributed. Assets suitable for transfer into a living trust include:

To transfer real estate properties into a living trust, follow these steps:

  1. Prepare a new deed for the property, indicating the trust’s name as the new owner.
  2. Sign and notarize the new deed.
  3. File the new deed with the appropriate office.

It is highly recommended to seek advice from a legal professional when transferring assets into the trust to ensure a smooth and accurate process.

Advantages of using a living trust

Several advantages come with living trusts, such as:

  • avoiding probate
  • protecting privacy
  • maintaining flexibility and control over asset distribution

These benefits make living trusts a potentially attractive option for those looking to secure their financial future and provide for their loved ones.

Avoiding probate

Probate is the legal process through which a probate court verifies your will and subsequently grants authorization to your executor to distribute your estate to your beneficiaries according to your instructions. 

Living trusts avoid probate, which can be a time-consuming and costly process, allowing for more efficient asset distribution to beneficiaries.

Living trusts offer several advantages:

  • Saving time and money
  • Ensuring assets are distributed according to the grantor’s wishes
  • Cost savings in the long term
  • Minimizing potential disputes among heirs

Privacy protection

Living trusts offer privacy protection by allowing trust assets to bypass probate, keeping legal documents out of the public domain. This serves as an additional safeguard for assets and assists in preserving privacy.

The probate process renders estate matters public by involving the court and making the distribution of assets and payment of debts a matter of public record. By choosing a living trust, you can maintain the confidentiality of your estate’s information, shielding it from creditors and legal disputes.

Flexibility and control

Revocable living trusts provide flexibility and control, allowing the grantor to modify or terminate the trust as needed. This advantage guarantees that the trust creator’s wishes are adhered to, and the assets are properly distributed.

Living trusts offer several advantages over wills, including:

  • More control over asset distribution
  • Transfer of assets to beneficiaries without going through probate
  • Increased privacy and control
  • Ensuring that your loved ones receive the assets according to your desires

Disadvantages and considerations of a living trust

Despite the many benefits of living trusts, it’s important to consider certain drawbacks such as initial costs, time commitment, and tax implications. It is essential to weigh these factors when deciding whether a living trust is the right choice for your estate planning needs.

Initial costs and time commitment

Establishing a living trust can be expensive and time-consuming, requiring legal assistance and the re-titling of assets. The average cost of setting up a living trust in the US is generally between $1,500 and $3,000, not including the cost to maintain the trust throughout your lifetime (fees vary depending on complexity and where you live).

The time it takes to establish a living trust may also vary from a few weeks to several months, depending on certain conditions. Despite these initial costs and time commitment, a living trust can still provide you and your loved ones long-term benefits and peace of mind.

Tax implications

Living trusts do not offer direct tax benefits, as assets within the trust are still considered part of the grantor’s estate for tax purposes. Transferring assets to a revocable trust will exclude those assets from probate laws at the state level. However, it will not exempt assets from federal or state estate taxes.

The income generated from the assets in a living trust is generally imposed upon the trust’s creator or grantor. Trust beneficiaries are responsible for paying taxes on income and other distributions from the trust but are not obligated to pay taxes on returned principal from the trust’s assets.

Living trust vs. will: Which one is right for you?

Both living trusts and wills can address your estate planning needs, but each has unique benefits and drawbacks. Comparing the two can help you determine the best option for your circumstances, taking into consideration factors such as asset distribution and planning for minor children.

Asset distribution

Living trusts offer several advantages over wills, including:

  • More control over asset distribution
  • Avoidance of probate
  • Quicker and more efficient distribution of assets to beneficiaries
  • Flexibility in managing and updating the trust

These benefits make living trusts a popular choice for estate planning. 

On the other hand, wills are more straightforward and less expensive to create than living trusts. They still allow you to specify how you would like your assets to be distributed to your children and appoint a guardian for any underage children.

Establishing a revocable living trust can be more complex and expensive than a simple will. It doesn’t have estate tax advantages nor guard against creditors. Furthermore, it cannot designate guardianship for minor children.

Estate planning for minor children

While both living trusts and wills can address estate planning for minor children, trusts provide more control and flexibility in managing assets for their benefit. A living trust enables the nomination of a trustee who will administer the assets on behalf of the children until they reach a predefined age.

Wills, on the other hand, allow you to designate a guardian for minors if you pass away and specify how your assets will be distributed to them. Ultimately, the choice between a living trust and a will depends on your specific estate planning needs and personal preferences.

Related: What’s the difference between Special Needs Trusts and ABLE accounts?

Tips for choosing a living trust attorney

Choosing the appropriate living trust attorney is key to ensuring a smooth estate planning process. Consider the following factors when making your decision:

  • Expertise: Look for an attorney who specializes in living trusts and has experience in estate planning.
  • Cost: Inquire about the attorney’s fees and any additional costs associated with the process.
  • Communication approach: Find an attorney who communicates effectively and is responsive to your questions and concerns.
  • Background: Investigate attorneys in your area, scrutinize reviews, and request recommendations from friends and family to find the best fit for your needs.

Keeping your living trust updated

It’s important to regularly update your living trust to account for life changes, fluctuations in asset value, and alterations in trustees or beneficiaries. Most financial planners and attorneys recommend revising your living trust every 3-5 years to ensure it accurately reflects your current circumstances.

Common reasons for revising a living trust include:

  • Marriage or divorce
  • Moving 
  • Change in financial status
  • Passing of a trustee or beneficiary
  • Novel tax regulations

Staying on top of these changes will guarantee that your living trust remains an effective and up-to-date estate planning tool.

Related: The ultimate guide to prenuptial agreements: Benefits, myths, and tips

Final word

Living trusts offer numerous advantages, such as avoiding probate, protecting privacy, and maintaining flexibility and control over asset distribution. However, they also come with drawbacks, like initial costs and tax implications. 

Comparing living trusts and wills can help you determine the best estate planning option for your circumstances. Keeping your living trust updated and working with a knowledgeable attorney and trusted financial advisor can secure a brighter financial future for your loved ones.

Frequently Asked Questions

What is the point of a living trust?

A living trust is a legal arrangement used to manage assets and provide instructions for the distribution of assets after the grantor’s death. It allows the grantor to designate a trustee who will manage assets according to the beneficiaries’ best interests, as well as decide how property will be distributed. The trust also gives the grantor control over how their beneficiaries spend their inheritance, allowing them to set conditions or restrictions on how the funds are used. This can be particularly beneficial for individuals who want to ensure their assets are used responsibly and for specific purposes.

What is the downside to a living trust?

The downside to a living trust is that the settlor can revoke it at any time to maintain control over assets, and any income earned from these assets must be reported on their individual income tax return. Additionally, living trusts are expensive, have no direct tax benefits, and do not provide protection against creditors.

What are the pros and cons of a living trust?

The pros of a living trust include avoiding probate, increased privacy protection, and protection in the case of incapacitation. However, living trusts can be expensive to set up, don’t offer direct tax benefits, and don’t protect against creditors.

What assets should not be in a trust?

Cash, vehicles, HSAs, 403(b)s/401(k)s, IRAs, and any assets held outside the US should not be placed in a trust.

What assets can be included in a living trust?

Assets such as bank accounts, real estate property, insurance policies, stocks, bonds, and other financial investments can all be included in a living trust.