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What Is A Living Trust And How Does It Work?

13-Minute Read
Published on November 21, 2022
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Contrary to popular belief, a living trust does more than keep a millionaire’s beneficiaries from fighting over an inheritance. Instead, it can be a practical tool in estate planning for anyone, whether you have already written a last will or haven’t thought about estate planning before.

A living trust can keep your assets out of probate and place them directly with your beneficiaries when you pass away. In addition, you can retain ownership of your assets until your death. Understanding what a living trust is and how it works can help you determine if it’s the right option for you.

What Is A Living Trust?

A living trust is similar to a will but doesn’t require probate court. It can be a useful and efficient way to ensure your assets are transferred to beneficiaries when you pass away. The trust also designates a trustee you appoint to manage your assets or disburse them to your beneficiaries.

How Do Living Trusts Work?

A living trust allows you to appoint someone to manage and allocate your assets when you no longer can. For instance, you may want to transfer property to your children. So, you create a legal document with the help of an estate planning attorney declaring the terms of the living trust.

You, the trustor, transfer property ownership to the trust and appoint a trustee to manage the assets. While you are still alive, you maintain control of the property, and when you pass away, your beneficiaries will receive the property according to your wishes.

As a result, living trusts provide two primary benefits: they define the plan for managing assets in the future while giving control to the trustor until they pass away.

Types Of Living Trusts

The most common types of living trusts are revocable and irrevocable, though you should understand all your options to find the right one for you.

Revocable Living Trusts

You can revoke, change or alter a revocable trust. Since it is not set in stone at the time of signing, a revocable trust is a flexible option that allows you to take on the role of trustee and beneficiary while you’re alive. That way, you can continue using and managing your assets in the trust as long as possible. With this type of trust, you can change the roles at any time or name successors to take over when necessary.

Irrevocable Living Trusts

In contrast, the trustor can’t unilaterally change or alter an irrevocable living trust. Once you sign the trust, you can’t change it without the consent of the named beneficiaries. In an irrevocable trust, the trustor transfers their property to the trust, removing certain legal rights of ownership.

Giving up control of your assets may seem like a lousy idea, but it can benefit all parties involved. For example, since the trustor no longer owns the assets in their trust, they can lower their estate taxes or avoid them altogether. Irrevocable trusts also protect assets from lawsuits, debt collections and divorce proceedings against the trustor. These are the reasons people choose an irrevocable living trust over a revocable living trust.

Specialized Living Trusts

Specialized trusts accommodate unique circumstances. For example, you can set up a charitable trust to send specific assets to a charity of your choice. Or, if you have a beneficiary with special needs, you can create a special needs trust that will prevent them from losing other benefits. This guide will dive deeper into specialized trusts later.

How Does A Living Trust Differ From A Will?

Generally, it’s helpful to pair a living trust with a will to address your wealth and assets thoroughly. Similar to a living trust, a will is a legal document laying out how you want your assets allocated after your death. However, there are several key differences between the two:

  • Effective date: A will takes effect when you pass away. A living trusts takes effect as soon as the trustor signs it.
  • Probate: Wills require a probate process before distributing assets. This feature means family members and other loved ones can contest the will during a public hearing. Living trusts do not require probate.
  • Cost: Wills typically cost less to prepare than living trusts, but they may rack up more costs for your beneficiaries due to probate.
  • Privacy: Wills enter the public record, while trustees privately handle the directives of living trusts.
  • Flexibility: Wills allow you to name guardians for dependents and underage children. Living trusts do not.
  • Trustees: Living trusts allow you to appoint a trustee to manage your assets if you become incapacitated. Wills do not.
  • Legal protection: Living trusts are typically much more difficult to contest than wills.

Do You Need A Will If You Have A Living Trust?

If you have a living trust, it’s recommended that you create a “pour-over will,” which works in conjunction with your trust. The pour-over will acts as a safety net by covering any assets that are not in your trust, whether forgotten, omitted intentionally or acquired after you created the trust.

You’ll also need a pour-over will if you wish to name a guardian for your underage children or want to provide final wishes for your funeral and burial. In addition, you can design your will to transfer external assets to your trust upon your death. Because a living trust alone doesn’t address these issues, it’s advised to also create a will.

Advantages Of A Living Trust

Wills are universally helpful, but a living trust has more specific purposes. Whether you need one depends on several different factors. Here’s a deeper look into its main advantages.

Your Beneficiaries Can Avoid Probate

What is probate? It is the process by which a court validates your will, settles your estate, distributes your assets as directed and pays any estate taxes owed. As a result, probate court rulings can override the intentions of your will.

Unlike a will, living trusts do not need to go through probate since the trustor has already transferred assets to the trust. Your trustee transfers ownership of assets upon your death without a court handling the procedures.

Avoiding the probate process is advantageous because it can cause your final wishes to get tied up in court dates and legal fees. In addition, wills become public record after entering court.

These factors can cause a hassle for your beneficiaries and postpone the distribution of your assets, especially if there are complications. Plus, your beneficiaries might incur heavy legal expenses if proceedings slow down.

You Can Keep Your Personal And Financial Matters Private

Probate is a state legal process. Therefore, your will becomes public record when it goes to court. That means anyone can access your personal and financial information, which may include an inventory of your estate, copies of your will and other legal documents and the names of your beneficiaries.

As a result, family or loved ones not in the will can mount an argument in court after reviewing the information. Disputes from parties claiming a legal interest in your estate can alter proceedings concerning your will. Conversely, living trusts keep your information private since they are not subject to probate.

It Can Provide Flexibility

Living trusts grant complete control to the trustor while they live. This feature allows you to adjust the distribution of assets, terms of the trust, and beneficiaries at any time. In addition, you can design the will to name you as the beneficiary until your death, guaranteeing that your beneficiaries only receive control of specific assets once you pass away. Furthermore, you can cancel a revocable living trust entirely if it becomes untenable or undesirable down the road.

It Can Protect Your Beneficiaries

Along with maintaining privacy, living trusts add layers of protection that bring peace of mind knowing your assets will go to your beneficiaries as you intend. Plus, living trusts enact your intentions without interference from courts and family members even if you are incapacitated or deceased.

By assigning a trustor to manage the distribution of your assets, you can protect your beneficiaries from themselves. For example, you may have a beneficiary who is in a struggling marriage, suffers from addiction, manages money poorly or is too young to use an inheritance wisely. In other words, you can name troubled family members and minor children in your living trust without handing your estate over unconditionally.

To offset foreseeable pitfalls, you can add stipulations to a loved one’s inheritance or use a specialized trust. For instance, you can disburse the money in monthly payments instead of one lump sum, make the assets only accessible after an 18th birthday or leave assets only to those in your direct bloodline, which would exclude spouses.

If you have beneficiaries with special needs, a trustee managing assets through a special needs trust could protect them from losing vital financial assistance. If a special needs beneficiary inherits assets through a will, they could lose such government benefits as Supplemental Security Income or Medicaid. A living trust circumvents such issues. Because the trustee, not the beneficiary, controls the assets, government programs don’t count them as income when determining eligibility.

When setting up a trust with specific directions and stipulations, it is best to consult a legal professional to ensure the trust’s wording best meets your wishes.

It Provides For Disability

Living trusts can also designate fiduciaries if you experience a disability preventing you from managing your assets. This trait allows you to prepare for future health complications by designating who the co-trustee or successor trustee will be once you are unable to manage the trust.

In other words, your living trust document can name you as the grantor and trustor until you pass away or become incapacitated. Then, when one of these two events occurs, a specified person becomes the trustee in your stead and manages the trust.

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Limitations And Disadvantages Of Living Trusts

Living trusts also introduce specific challenges for trustors. Be prepared to overcome the following obstacles if you want to create a living trust.

Living Trusts Don’t Help You Save

While living trusts can benefit your financial circumstances, they aren’t savings tools. For example, you’ll likely have to apply assets in your living trust to nursing home expenses. As a result, you might receive less Medicaid assistance because your state will count the wealth in your trust. Likewise, the IRS considers your living trust for estate taxes as long as you’re alive, increasing your tax burden. 

Living Trusts Don’t Get You Off The Hook On Making Hard Decisions 

Living trusts reflect the trustor’s wishes rather than coming preloaded with selected beneficiaries. While a living trust can streamline the management of your assets, they don’t exempt you from the strenuous process of deciding who your beneficiaries will be and how they will inherit the wealth in the trust.

Legal Fees Can Be Costly

Although living trusts create a holistic financial plan, they bring significant legal expenses in the short term. According to Legal Zoom, those expenses range from $1,000 – $1,500 for an individual and $1,200 – $2,500 for a couple. Of course, these are only estimates. Fees vary from state to state, your choice of lawyer, and the complexity of the trust.

Another, albeit riskier, option is to draft your own living trust, which may cost around $100 for how-to books and software that helps you create it. While you could DIY a living trust, working with a lawyer is recommended. Trusts are legal documents and can be challenging to draft. Therefore, you’re taking a risk drafting one yourself. A single error could completely invalidate the trust.

Lawyers have the education and experience needed to draft a living trust document that will be the most beneficial to you and your final wishes. They’ll know the right questions to ask and the nuanced laws specific to your state.

You Can Lose Equity Ownership

Unlike a will, once you designate property toward a trust, it becomes the trust’s property. This situation means that technically only the trustee has the right to release that property back to you should you need to sell the property.

This added inconvenience has strengths and weaknesses. On the one hand, the trust can protect your beneficiaries' inheritance if your financial circumstances turn for the worse. But, on the other hand, you might run into barriers if you need to sell trusted real estate or vehicles.

Managing Property Titles And Deeds Can Be Challenging

If you want to transfer real estate property (a home, for example) to your trust, you will need to prepare and assign a new deed, transferring ownership to the trust. Personal property with a title (a car or boat, for example) will also require a new title in the trust’s name.

It is important to note that once you transfer ownership to the trust, you will no longer be the legal owner of that property. That means you cannot manage, use or sell it unless you have a revocable trust and have named yourself as the trustee and beneficiary. If you name yourself the trustee, you can use and manage your property as long as you can.

How Much Does It Cost To Set Up A Revocable Trust?

Your primary expense to set up a revocable trust will be your lawyer's fees. These vary based on your location, your estate's complexity and your lawyer's costs. Your lawyer might bill hourly or charge a flat fee for their services, although this is rare.

Setting up a revocable trust costs more up front than drafting a will. However, once a revocable trust is in place, no additional money is necessary for your trustee to carry out its directives. On the other hand, a will goes through probate court and therefore involves legal fees, title transfer fees and more.

How To Set Up A Living Trust

Before jumping into the actual drafting of the living trust, here are the initial steps to help the process move quickly and smoothly.

1. Take Inventory Of Your Assets

First, decide which assets you want in your trust. For example, you might designate ownership of your savings account and property to your trust. Furthermore, it’s crucial to consider which beneficiaries you would like to receive certain assets.

On the other hand, keeping specific assets, like cars, out of your trust is more beneficial. You can designate those with a separate, straightforward legal document. In addition, retirement accounts usually should stay external to the trust because of the payout penalties incurred by giving ownership to your trust. However, you can name your trust as the beneficiary of your retirement accounts, transferring the money after you pass away.

2. Compile Your Documents

Legal documentation for your assets is necessary to transfer them to your trust. For instance, the deed to your property, business ownership certificates and other financial records will substantiate your ability to place assets in the trust.

3. List Your Beneficiaries 

Who will receive assets from your trust and when they receive them are foundational to your trust. Just as importantly, decide who you want to exclude from your trust.

4. List Your Assets

Next, match the assets in your trust with a beneficiary. Remember, you can also decide what conditions can trigger the release of an asset, such as a beneficiary reaching adulthood.

5. Decide What Type Of Trust You Want

You can create a revocable, irrevocable or specialized living trust. You can change a revocable living trust however you wish, while irrevocable trusts take assets out of your hands, potentially giving you tax advantages and shielding assets from creditors. If you have a special needs beneficiary, a specialized living trust may suit you best.

6. Choose A Trustee

If you decide to get a revocable trust, you can name yourself as the trustee. However, you still need to choose a successor trustee to take over at the time of your death or if you become incapacitated.

7. Draft Your Trust

This step usually involves an attorney’s help, so you’ll need to find one first. You might get a recommendation from a close friend or family member who has created a trust or do some research of your own. In any scenario, it’s a good idea to speak with multiple attorneys to generate options.

8. Fund Your Trust

Once you’ve drafted the trust document, it’s time to place your chosen assets into your trust. Doing so will endow your trust with monetary value and designate beneficiaries for financial benefits.

Living Trust FAQs

Here are three additional questions potential trustors usually ask while creating a living trust.

How long does it take to create a living trust?

Creating a living trust can take as little as a few days or as long as a few weeks, on average. Whether you choose to draft the trust on your own or hire a lawyer to do it for you, the time it takes to create it depends on the complexity of the trust, how motivated the person drafting it is and if there is an emergency that requires an expedited process.

Once you sign the trust (in the presence of a notary), it is effective immediately. However, you’ll need to fund it, which typically takes a few months.

Do I need a living trust?

You don’t have to be a millionaire to have a trust. In fact, it may be prudent to look into getting one if you fall into one of the following categories:

  • You’ve had multiple marriages.
  • You have children.
  • You have a financial interest in a business or company.
  • A family member is disabled or mentally/physically ill.
  • You are on bad terms with one or more of your family members.
  • You deem family members irresponsible with managing financial affairs.

This list of reasons to have a trust is not exhaustive. So, it’s wise to consult a professional to help you decide whether a will or trust is best for you.

Can I get a mortgage on a trust-owned property?

The creator of a revocable living trust can get a mortgage on trust-owned property because they have the power to change the trust. However, if the creator of the trust is deceased, the trustee can’t alter the trust and therefore can’t get a mortgage on the trust-owned property.

The Bottom Line

A living trust is vital to ensure your wishes for your estate are carried out. In addition, living trusts offer more privacy and legal protection than wills. Plus, a living trust bypasses the hassle of probate court, streamlining the transfer of assets.

As a result, living trusts are worth the extra cost and legwork if you want your beneficiaries to receive your assets in a specific, uncontested way. Or, particular circumstances surrounding your beneficiaries might make a living trust your best option.

This guide is just the tip of the iceberg regarding the ins and outs of a living trust. As you think about financial planning for you and your beneficiaries’ future, you can learn about trust funds to guide your decisions. Since everyone’s lifestyle is different, it’s essential to consult an attorney and financial planner to determine your best course of action.

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Headshot Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is an experienced financial writer. In addition to being a contributing writer at Rocket Homes, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.