A living trust is a document that places your assets into a trust during your life and then distributes them to your beneficiaries after your death. The trust provides control over your assets and avoidance of probate.
How does a revocable trust work?
A revocable trust is a legal document that allows the grantor (the person who creates the trust) to take their personal assets and transfer them to the ownership of the trust during their lifetime.
While the trust technically owns the assets, the grantor continues to use them as he normally would with no change (living in his home, driving his car, and spending his money).
It is generally advisable to place as many assets into the trust as possible to maximize its benefits, but some assets, such as life insurance and IRAs (Individual Retirement Accounts) are not eligible for transfer. The trust controls the assets while the grantor is living and distributes them to named beneficiaries after death.
When a living revocable trust is established, a trustee is named who is responsible for managing the assets in the trust for the benefit of the grantor during his lifetime.
Most grantors name themselves as trustee so they can maintain complete control over the trust assets. In this situation, a successor trustee is also named to take over after the grantor’s death to manage the revocable trust and distribute assets.
Revocable living trusts are a popular estate planning option because they allow the grantor to make changes to the trust after it is set up and even permit the grantor to completely eliminate the trust. An irrevocable living trust cannot be altered once it is created and offers less freedom.
One of the reasons a living trust is so popular is that it avoids probate. Probate is the court process that reviews and validates wills. Probate can take months to complete and incurs the expense of an attorney as well as court fees.
When you use a last will to transfer assets after your death, your will must pass through probate before it can take effect. Once the will is approved, then the transfer of assets can take place. Wills become public record as part of the probate process.
A trust on the other hand does not need to go through probate and is not part of the public record (so no one knows anything about your beneficiaries or what assets you are distributing).
There are no fees involved with a trust. When you use a trust, your assets are passed according to the instructions you include in the trust document.
You can choose to transfer your assets to your beneficiaries immediately after your death, or you can set up transfer dates in the future (such as milestone birthdays to ensure your beneficiaries are mature when they inherit).
It is important to understand that just because an asset does not go through probate, does not mean it avoids estate tax. Assets passed via a trust or will are included in the taxable estate.
The federal estate tax currently applies only to estates worth more than $5.43 million. State estate taxes vary greatly with some states applying no tax and others applying tax to estates of moderate amounts.
It is commonly recommended that if you create a living trust you should also have what is called a pour over will. In case any property is mistakenly left out of the trust, the pour over will transfers those leftover assets to the trust.
To create a revocable living trust, you need to complete a revocable living trust form appropriate for your state.
This document identifies you as the grantor, names the trustee and successor trustee, selects your beneficiaries, identifies the assets held in trust, and lays out the terms of the trust (when and to whom assets will be distributed). The trust is signed by the grantor in front of a notary public. It is not filed with the state.
The trust is not actually functional until ownership of assets is legally transferred to it. Real estate can be transferred using a quitclaim deed. Vehicles are transferred via title transfer through the state Department of Motor Vehicles. Bank accounts and investments must be changed so they are held by the grantor as the trustee.
For example, John Doe, the grantor and trustee, would make sure to change his accounts so they are owned by John Doe, Trustee of the John Doe Living Trust. Other items of personal property (such as your jewelry or furniture) can be listed on a property schedule and attached to the trust document with a reference that they are being transferred into the trust.
How LegalZoom can help with a living trust
A living trust can be used to transfer property and assets to beneficiaries without going through the probate process. This can save years of time and thousands in fees. Also, it keeps your estate private, whereas a last will, once probated, will become public record.
People often use a last will and a living trust together. A last will can be used in conjunction with a living trust to name guardians for minors and express final wishes not otherwise captured in a living trust. See what kind of Living Trust products LegalZoom offers.
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