What Is a Living Trust and Do You Need One?

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 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 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.

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.

Who Needs a 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 it 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

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area. You can have a free introductory call with your advisor matches 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.
• 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.

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