What Is a Living Trust and Do You Need One?

A living trust is a legal arrangement that lets you place assets under the management of a trustee during your lifetime and establish how those assets should be handled after your death. A properly funded living trust can also help certain assets avoid probate and provide continuity if you become unable to manage them yourself. But creating a trust isn’t necessary for every estate. Simply signing the documents doesn’t automatically move your property into it, either.

A financial advisor can help you consider how your investments and other financial assets fit into a broader estate plan.

How a Living Trust Works

A living trust is a legal arrangement that allows you to transfer control of certain assets to a trustee. You can act as your own trustee or you can appoint someone else to do so. The trustee is responsible for managing assets in the trust on behalf of you and your beneficiaries. The living trust takes effect while you’re still alive and it continues after your death, unless you include a provision to terminate the trust on a specific date.

Depending on your preference, you can set up a living trust to be revocable or irrevocable. A revocable living trust is a more flexible option since you can change it at any time. This means you can move assets in and out of the trust whenever you want, or revoke the trust at any time. An irrevocable trust is permanent. This means once the assets are put in the trust, you can’t take them out again.

While you can set up a living trust for yourself, it may actually make more sense to get help from a professional. There are a number of details you’ll need to make sure you get correct. The specific rules for setting up a living trust may vary based on the state you are in. The rules in California or Texas, for example, may be different from New York or Illinois.

What Assets Can You Put in a Trust?

Some of the different assets you can transfer to a living trust include:

real estate
cars
boats
bank accounts
antiques
jewelry
artwork
family heirlooms
stamp or coin collections
stocks
bonds
mutual funds
other securities

Depending on the type of asset you’re transferring, you may have to get a new deed or title issued in the trust’s name.

Certain types of assets can’t be owned by a trust. However, you can still name the trust itself as the beneficiary. For example, you can name the trust as a beneficiary for a retirement account, such as a 401(k), IRA or for your life insurance policy. When you die, your benefits are automatically paid into the trust.

How to Set Up a Living Trust

Creating a living trust doesn’t have to be overwhelming. While it involves several legal steps, the process is manageable if you break it down into clear stages:

Take Inventory of Your Assets. Start by making a list of all the assets you want to place in the trust. This may include real estate, bank accounts, investments, vehicles, valuable personal property and more. Decide whether you want to include all major assets or only certain ones.
Decide on the Type of Trust. Choose between a revocable or irrevocable living trust. A revocable trust gives you the flexibility to make changes later. An irrevocable trust offers less control but may provide certain legal or tax protections.
Choose a Trustee. You can serve as your own trustee, or appoint someone you trust, such as a family member, friend or professional fiduciary. You’ll also need to name a successor trustee who will manage the trust after your death or if you become incapacitated.
Name Your Beneficiaries. Decide who will receive the assets held in the trust. You can name individuals, organizations or charities as beneficiaries. Be as specific as possible, and consider contingencies in case your primary beneficiaries are unable to inherit.
Draft the Trust Document. The trust agreement outlines all terms, including who manages the trust, how assets are distributed and under what conditions. While online templates exist, working with an estate planning attorney ensures the document complies with your state’s laws and reflects your wishes.
Transfer Assets Into the Trust. This step is critical; simply creating the trust document isn’t enough. You must formally transfer ownership of each asset into the trust. This could involve retitling property deeds, updating account ownership forms or changing beneficiary designations.
Keep the Trust Updated. Review your trust regularly and make updates as needed. Major life changes like marriage, divorce, birth of a child or a move to another state may require adjustments to your trust documents.

Does a Living Trust Avoid Probate?

A living trust can generally help assets avoid probate if they are properly transferred to and held by the trust. Instead of passing through a will and probate estate when the grantor dies, those assets remain in the trust and are managed or distributed by the successor trustee according to the trust’s terms.

However, simply creating a living trust does not automatically keep all of your property out of probate. You generally need to fund the trust by transferring appropriate assets into it. Depending on the property, this could involve changing the title on a home, transferring ownership of a financial account or completing other documentation.

For example, suppose you create a revocable living trust and transfer your home into it. When you die, the successor trustee can generally administer the home according to the trust rather than having it pass through probate. But what if you create the trust and leave the home titled solely in your individual name? In that case, the trust alone may not keep that property out of probate.

As we mentioned above, some assets can avoid probate without being owned by a living trust. Life insurance policies and retirement accounts, for example, generally pass according to valid beneficiary designations. Other property may transfer through mechanisms such as joint ownership with rights of survivorship or payable-on-death and transfer-on-death designations, where available.

A living trust also does not necessarily eliminate probate altogether. Property left outside the trust that does not have another method of transferring directly to a beneficiary may still become part of the probate estate. This is one reason living trusts are often paired with a pour-over will, which can direct certain remaining assets into the trust at death, although those assets may still need to pass through probate first.

Living Trusts and Taxes

Living trusts offer many estate planning advantages, but tax savings aren’t always one of them. It’s important to understand how different types of taxes apply.

Income Taxes

If you create a revocable living trust, you’re still considered the owner of the assets for tax purposes. That means income generated by the trust’s assets, like dividends, interest or rental income, continues to be reported on your personal tax return. There’s no special tax treatment while you’re alive.

If the trust becomes irrevocable, the situation changes. The trust itself may need to file its own tax return and pay taxes on any income, depending on how it’s structured. However, irrevocable trusts are more complex and often used in more advanced estate planning.

Estate Taxes

A revocable living trust does not reduce the size of your taxable estate. The assets in the trust are still counted as part of your estate when calculating federal estate tax liability. An irrevocable trust, on the other hand, may help reduce your taxable estate because the assets are no longer under your control. That said, this strategy must be carefully planned to comply with IRS rules.

Gift Taxes

Transferring assets into a revocable living trust generally doesn’t trigger gift taxes because you retain control. However, transfers to an irrevocable trust may be treated as taxable gifts if the beneficiaries have immediate access or rights to the trust assets.

In short, while living trusts are great tools for probate avoidance and managing your estate, they don’t automatically provide tax breaks. It’s a good idea to speak with a financial advisor or estate planning attorney if minimizing taxes is a primary goal.

Living Trust vs. Will

There are several situations where having a living trust benefits you more than if you only have a will. For example, having a living trust in place can help you avoid conservatorship if you become incapacitated and can’t manage your finances. Instead of the court appointing someone to oversee your estate, your trustee can continue to take care of things on your behalf.

A living trust offers a significant advantage, allowing your beneficiaries to bypass the probate process after your death. Probate is the legal procedure where a probate court oversees the administration of your estate. This includes validating your will, ensuring debts are paid and distributing assets to your heirs.

However, probate can be a lengthy and costly process, especially if your estate is substantial or the validity of your will is contested. By transferring assets into a living trust, they become exempt from probate, saving time and expenses for your loved ones.

A living trust is also a practical option for leaving assets to minor children. If you leave assets to a minor through a will, a court-appointed adult is typically required to manage the inheritance on their behalf. Once the child reaches the age of majority, either 18 or 21, depending on state laws, they gain full control of the assets.

With a living trust, you can establish more specific guidelines for how and when the assets are distributed. This offers greater flexibility and protection for your children’s financial future. For example, you can include a provision that says they have to graduate college or reach a certain age before they can access their trust fund.

Do You Need a Living Trust?

Not everyone needs a living trust. Whether creating one makes sense can depend on what you own, how you want your property transferred, your state’s probate rules and whether you want someone to be able to manage trust assets if you become incapacitated.

A living trust may be worth considering if you:

Want certain assets to avoid probate. Property properly transferred into a living trust can generally be administered outside the probate process after your death.
Own real estate in more than one state. Holding qualifying property in a trust may help an estate avoid separate probate proceedings involving property located in another state.
Want a plan for incapacity. A successor trustee can generally take over management of trust property according to the trust’s terms if you become unable to manage it yourself.
Have minor beneficiaries. A trust can establish rules for how property is managed and when it is distributed rather than giving a beneficiary control of the entire inheritance as soon as legally permitted.
Want more control over inheritances. Trust terms can establish conditions or schedules for distributions instead of transferring all property to beneficiaries at once.
Want greater privacy. Unlike a will admitted to probate, a living trust generally does not become a public probate record, although disclosure requirements and circumstances can vary.

A living trust may offer fewer advantages if you have a relatively simple estate and most of your property already transfers outside probate through beneficiary designations, joint ownership or other transfer mechanisms. Cost and maintenance also matter because creating a trust is only the first step. You may need to retitle assets, update the trust as your circumstances change and potentially pay legal or professional fees.

Estate size alone doesn’t determine whether you need a living trust. A person with a relatively modest estate could have reasons to create one. Meanwhile, someone with substantial assets might already have other arrangements that accomplish some of the same goals. Comparing the assets you own, how they currently transfer at death and the probate rules in your state can help clarify what a living trust would add to your estate plan.

Bottom Line

A mother and daughter embrace, having set up a living trust for the daughter's future.

A living trust can provide a way to manage assets during your lifetime and establish how they should be handled after your death. Properly funded trusts can also help certain assets avoid probate. Meanwhile, a revocable living trust can generally be changed as your circumstances or estate-planning goals evolve. However, a living trust doesn’t replace every function of a will, automatically reduce estate taxes or eliminate the need to properly transfer assets into the trust. A financial advisor can help you evaluate how your financial assets may fit into an estate plan.

Estate Planning Tips

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If you’re ready to get started on your own estate planning on your own, this checklist can help you start off on the right foot.