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living trust

A living trust is a financial instrument used to make sure your money goes to the right people when you die. No one likes to think about dying but when it comes to managing your finances, you have to be prepared for the inevitable. Having a solid estate plan in place can ensure that your family is taken care of after you’re gone. A last will and testament and a living trust are two useful tools you can use to form your estate plan. If you don’t have a lot of assets or you plan to leave everything to your spouse, a will may be enough. A living trust lets you dictate how your assets are handled before and after you die, but whether or not you need one depends on several factors. A financial advisor can help you with all manner of estate planning issues.

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 the more flexible option, since you can change it 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, which 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, as 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 very 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 and 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 but 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.

Living Trust vs. Will

living trust

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 also allows your beneficiaries to avoid probate after your death. Probate is a legal process in which your estate is handled by the probate court. After the court validates your will, an executor is responsible for paying any debts owed by your estate and distributing your assets to your heirs. Depending on how large your estate is and whether the validity of your will is disputed, probate can be a very time-consuming and expensive process. Transferring assets to a living trust makes them exempt from probate.

A living trust is also useful if you want to leave assets to your minor children. Generally, if you bequeath assets to a minor child in your will, the court will appoint an adult to manage their inheritance for them. When they reach the age of majority, which is typically either 18 or 21 depending on the state, they’re able to take control of the assets themselves.

When you leave assets to a minor in a living trust, you can leave specific instructions with the trustee as to how and when they can receive their inheritance. 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.

Who Needs a Living Trust?

living trust

There’s no hard-and-fast rule for determining who does or doesn’t need a living trust. Generally, you should weigh the size of your assets and whether or not you have dependents against the cost of setting up and maintaining the trust. If you don’t own a lot of property or you’re not married, a will by itself may be enough. On the other hand, if you’re looking for some additional protection for your assets, setting up a trust may give you the financial peace of mind you’re looking for.

Bottom Line

A living trust is a useful tool for estate planning. It allows you to have greater control over what happens to your assets after you die. Remember, a living trust does not replace a will, but can be used alongside a will as part of your estate plan. While you can create a living trust by yourself, getting help from a professional is probably the way to go.

Estate Planning Tips

  • For help with living trusts or any other financial questions, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • One way to make sure you have enough money to leave to your family is through carefully saving for retirement, possibly with a workplace retirement plan like a 401(k).

Photo credit: ©iStock.com/Piotrekswat, ©iStock.com/fizkes, ©iStock.com/gradyreese

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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