Living Trust

A living trust is an estate planning tool that allows a person, called the settlor or grantor, to place assets into a trust during their lifetime. A trustee manages those assets for the benefit of the trust’s beneficiaries. A living trust can also name a successor trustee to manage or distribute trust assets if the settlor becomes incapacitated or dies.

People often use living trusts to manage assets and help transfer property outside the probate process. However, a living trust only controls assets that have been properly transferred into the trust.

Living trusts can be revocable or irrevocable. Revocable living trusts can be modified at any time and for any reason, and you also serve as both the grantor and the trustee, allowing you to maintain complete control over your assets while you’re still living. Irrevocable trusts, which are commonly created for asset protection or to reduce estate tax liability, are typically much harder to modify without legal intervention.

How a living trust works

The grantor creates a trust document naming a trustee (who manages the trust) and beneficiaries (who receive the assets). In most cases, the grantor serves as their own trustee during their lifetime.

Once signed, the grantor should fund the trust by transferring or retitling eligible assets, such as real estate, bank accounts, and investment accounts, into the trust's name. The grantor retains full control while alive and competent. If the grantor becomes incapacitated, a named successor trustee steps in. Upon death, the successor trustee distributes assets according to the trust's terms, with no court involvement required.

The grantor creates a trust document that names a trustee (who manages the trust) and beneficiaries (who receive the assets).

Once signed, the grantor should fund the trust by transferring or retitling eligible assets, such as real estate, bank accounts, and investment accounts, into the trust’s name.

If the grantor becomes incapacitated, the trustee may take over the management of trust assets after meeting the trust’s incapacity requirements. The trustee distributes assets according to the trust’s terms, addresses applicable debts, and pays taxes, with no court intervention.

Why a living trust matters

The primary advantage is probate avoidance. Probate is the court-supervised process of validating a will and distributing an estate; it can take months and is a matter of public record. Assets held in a living trust are generally distributed by the successor trustee outside the probate process.

A living trust also provides continuity during incapacity. If the grantor cannot act due to illness or injury, the successor trustee steps in immediately, without a court-appointed conservatorship. For grantors who own real estate in more than one state, a living trust eliminates the need for separate probate proceedings in each state.

Living trust vs. last will and testament

A will must go through probate; a living trust does not. A will becomes a public record; a trust remains private. However, a will is simpler and less expensive to create, and it can accomplish things a trust cannot, such as naming a guardian for minor children. Many estate plans include both, using a pour-over will to direct any assets not already in the trust into it upon death.

Considerations and limitations

A living trust requires ongoing maintenance. The grantor must retitle new assets into the trust to receive the probate-avoidance benefit. Assets left outside the trust at death may still be subject to probate.

A living trust does not eliminate federal or state estate taxes. Although federal estate tax exemptions are relatively high and change periodically, tax planning may still be necessary for larger estates. An irrevocable trust may be more appropriate for certain tax planning or asset protection goals. However, it is better to consult an estate planning attorney to manage your assets according to your wishes.

Related terms

A living trust connects to several estate planning documents that work alongside it or serve related functions.

• Successor trustee: The person or entity named to manage the trust when the initial trustee can no longer serve.
• Pour-over will: A will that directs certain assets left outside the trust into it after death
• Last will and testament: A document that directs asset distribution after the will maker’s death but requires probate court.
• Financial power of attorney: A document that authorizes another person to handle financial matters outside the trustee’s authority.
• Advance healthcare directive: A document that states healthcare preferences and names someone to make medical decisions.

FAQs about living trust

What is the downside of a living trust?

A living trust may cost more and take more time to establish than a basic will. It also requires ongoing maintenance because assets must be properly transferred or coordinated with the trust. Property left outside the trust may still require probate.

What assets should not be placed in a living trust?

IRAs and employer-sponsored retirement plans, such as 401(k)s, generally remain in the account owner’s name rather than being retitled to a living trust. These accounts pass under their beneficiary designations and are subject to special tax and distribution rules.

Does a living trust protect assets from creditors?

A revocable living trust does not. Because the grantor retains control, the law generally treats the trust assets as still belonging to the grantor. An irrevocable trust may provide creditor protection because the grantor gives up ownership and control, subject to applicable law.