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What Is a Living Trust and How Does It Work?

You may know that if you make a will, it comes into effect after you pass away. But while you’re still alive, there’s a way to manage your estate too—through something called a living trust.

It’s worth taking a closer look at living trusts and whether one could work for you, because almost anyone can set one up as a part of their estate plan. But the truth is, only a small percent of people actually need one.  

Let’s look at living trusts and how they work.

What Is a Living Trust?

A living trust is a special kind of fund that can own someone’s stuff while they’re still living. And just like all trust funds, a living trust also spells out how to distribute what’s in the trust after the original owner dies.

Almost anything can be placed into a living trust—if it has value of any kind, it can go in. Here are some examples:

  • Real estate
  • Bank and savings accounts
  • Vehicles
  • Fine art and jewelry
  • “Virtual” valuable items like mining rights and intellectual property

How Does a Living Trust Work?

When a living trust is formed, the one who owns the stuff (the grantor) transfers the ownership of their assets to the trust itself.


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Let’s pretend you own an investment property. If you have a living trust, you could take the deed of the property, scratch off your name and put it in the name of the trust. From that point on, you would not own the property anymore—the living trust would.

You can do the same thing with the titles to vehicles, documents from financial accounts, and anything else you want to put in the name of the trust. This process is called funding the trust, and the items together form a trust fund.

Next, a “trustee” is named by the grantor in the trust document to make sure the instructions in the trust contract are carried out. The trustee might be a relative or could be an appointed professional trustee, usually from a financial institution.

From that trust fund, the grantor can leave a full inheritance to their heirs (called the beneficiaries). They also have the power to place certain conditions that need to be met before beneficiaries can receive items from the inheritance (like a grandchild finishing college before inheriting the car.)

Types of Living Trusts

Now let’s take a look at the two types of living trusts: revocable trusts and irrevocable trusts.

Revocable Trust 

The revocable trust is by far the most common type of living trust. So much so that people refer to it simply as “a living trust,” or “a living revocable trust.” Just as the name hints, a revocable trust can be changed or revoked (canceled) by the grantor at any time. Doing this is not a quick job, but it can be done, which makes it a flexible option.

Irrevocable Trust

The irrevocable trust is active and cannot be changed, even by the grantor. It would take a judge to decide whether a change can be made, and even then, the circumstances would have to be pretty special. This naturally makes the revocable trust a more popular option. In fact, some people might start off with a revocable trust but then convert it to an irrevocable trust later (when they’re more certain of things.)

The other thing to know about both types of living trusts is that when the grantor has died, their revocable trust automatically converts to an irrevocable one anyway (because the only person who could have changed it has passed on.)

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Benefits of a Living Trust

A living trust could have some advantages for you over other ways to manage your estate. Here are the benefits:    

  1. Saves time and money in the probate process – A living trust names a trustee who can immediately take care of your end-of-life affairs—like paying for funeral costs and distributing property to heirs—without having to wait on the probate judge. Less waiting time means less probate costs and more savings.
  2. Offers more protection if challenged – A living trust is less likely to be challenged in court than a simple will. It’s harder for the challengers, because they would have to prove you were coerced into signing the documents and forced to go through the whole process of funding the trust.
  3. Protects privacy better – Because a will is a public document, anyone can get a copy of it after your death from the county records. But a living trust is totally private. With a trust, no one can know the details without the trustee sharing that information.

Disadvantages of a Living Trust

Not everything is rosy with a living trust, so it’s important to weigh the pros and cons before you decide to create one. Here are a few issues that could make having one a hassle:

  1. Personal inconvenience – Since it’s set up before you die, none of the stuff in the trust is your property anymore. It’s the property of the trust. So, if you want to sell something that’s already a part of the trust (like your house or car), you have to contact the trustee (if it’s not you) to take it out of the trust before you can sell it.
  2. Attorney fees – Trusts can be costly to set up. While you can easily get a will online, you should only set up a trust with an attorney. Just know their guidance comes with attorney fees, and will cost a couple of thousand dollars to get off the ground. And if you need to make a change to your living trust, you’ll have to use the attorney all over again, which means more fees!
  3. Retitle and re-deed process – After the attorney sets it up, they’ll give you some homework: to retitle or re-deed property and other items so that the trust fund is named as the owner. If you don’t do this, the trust doesn’t work to its full potential. You’ve basically paid for the blanket of protection but haven’t put anything under the blanket. Many trusts are established but never funded.

Living Trust vs. Will

What’s the difference between a living trust and a will? Here are some key differences:

  • A living trust is not a public document like a will. If you have nosy relatives who want to know how things were distributed, a living trust protects that information, unless the trustee decides to share it.
  • A living trust helps you skip probate costs (but still comes with attorney fees.) Any property given through the last will and testament is subject to probate. When handled through the living trust, it isn’t.
  • A living trust can’t appoint a guardian for your children. Only a will can do that.
  • A living trust takes more time to set up. There’s more paperwork involved with a living trust compared to a will.  

Do I Need a Living Trust?

While there’s not a one-size-fits-all answer, the vast majority of the population can get by without using a living trust. Dave Ramsey says, “A simple will is perfect for 95% of the population.” In other words, unless you have a really big estate.

Whatever you decide, you’ll want to take action and make it official. The best way to be prepared is by having your will in place. You can get your will online with RamseyTrusted provider Mama Bear Legal Forms in less than 20 minutes—providing some peace of mind for your loved ones once you’re gone.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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