What Is a Living Trust? by Belle Wong

What Is a Living Trust?

A living trust has a number of advantages, including avoiding the probate process. However, there are also some disadvantages to it that may render it unsuitable for your estate planning needs.

by Belle Wong
updated April 21, 2021 · 5 min read

A living trust, also known as a revocable living trust or a revocable trust, is a legal document that establishes a trust for any assets you wish to transfer into it. The main purpose of a living trust is to oversee the transfer of your assets after your death.

Under the terms of the living trust, you are the grantor of the trust, and the person you designate to distribute the trust's assets after your death is known as the successor trustee.

How a Living Trust Works

Your living trust holds the ownership rights or title to the assets you transfer to it. On your death, your successor trustee will distribute these assets in accordance with the terms of your living trust.

Because the living trust is revocable, you, as the grantor, retain control over the assets in the trust even after you've transferred ownership rights or title of the assets to the trust.

The revocable nature of the living trust means you can deal with the assets held by the trust like you were able to prior to transferring the assets into the trust. For example, you can:

  • Mortgage or refinance assets
  • Remove assets from the trust
  • Sell or give away any or all assets in the trust

You are also free to terminate the trust completely at any time. And because you have full control over the terms of the trust, you can change the beneficiaries of the trust at any time, as well as the person you've designated as your successor trustee.

The Advantages of Using a Living Trust

There are a number of advantages to using a living trust. They include:

  • Avoiding probate. This is often the main reason people use a living trust as part of their estate plan. The assets that are held by a living trust after your death can be distributed immediately by your successor trustee. Because these assets are held by your trust rather than your estate, they do not have to go through the probate process. Probate is a court-supervised process that can become complicated as well as time-consuming, and during this time the assets undergoing probate will be inaccessible to any of your beneficiaries.
  • Providing for your loss of capacity. Your successor trustee will also be able to step in to handle and administer the assets held by the living trust in the event of your incapacity to deal with the assets yourself. So, for example, if you suffer from an accident that leaves you unable to manage the assets in the estate, the terms of your living trust allow your successor trustee to take over, without having to apply to the courts for authority to do so.
  • Controlling the distribution of your property. Like a will, your living trust dictates what happens to your assets after your death. And you're not limited to distributing the property immediately to your beneficiaries. For example, if one of your beneficiaries is a minor, you can set up a trust within your living trust for that beneficiary until they reach the age of majority, or an age where you feel they'll be mature enough to handle their inheritance.
  • Keeping your affairs private. The probate process is an open process, which means it's a matter of public record. By keeping your assets in a living trust, you retain privacy for your family after your death. This means people can't search the public record to see what assets you owned at the time of death, and how they were distributed among your beneficiaries.

The Disadvantages of Using a Living Trust

There are also a number of disadvantages to using a living trust. They include:

  • Transfer of title. While setting up the trust itself isn't particularly complex, any assets you want the trust to hold will need to be properly transferred to the trust. Assets which do not require a transfer of title—for example, furniture or jewelry—can usually be transferred using a document that assigns ownership rights. But for those assets to which you own the title, such as real estate, a legal change of the ownership of title must be made to the title document itself.
  • Costs. The transfer of title process requires additional paperwork, and the payment of filing fees to register the changes with the proper authorities. And if you're dealing with multiple title changes, or more complicated assets, it may be advisable to consult with an experienced estate planning attorney to transfer title for you. These fees are all additional costs that are separate from the cost of creating the living trust itself.
  • No real tax advantages. Even though a living trust owns the property you transfer to it, you will continue to be taxed personally on the income generated by these assets. And while there may be some estate tax benefits of a living trust, depending on how it is drafted, the benefits are the same as could be achieved by a will.

Will vs. Living Trust

The following are ways in which wills differ from living trusts:

  • Wills don't come into effect until after your death, so they cannot be used to manage your assets prior to your death.
  • Wills must go through the probate process before the distribution of assets covered by the will can be made.
  • Because wills need to go through probate, the will itself becomes a matter of public record.
  • Your will is the appropriate place to designate a guardian for any minor children.

It's usually recommended that you still have a pour-over will to complement your living trust. A pour-over will exists to transfer your assets that aren't part of your trust to your trust when you pass away.

A living trust may be the ideal tool for your estate plan. However, there are distinct pros and cons of using a living trust which warrant careful consideration of whether a living trust is the right estate planning tool for your specific needs.

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Belle Wong

About the Author

Belle Wong

Belle Wong, J.D., is a freelance writer specializing in small business, personal finance, and marketing topics. Connect … Read more