You probably already guessed from the title—it is possible to manage your estate while you’re still alive by setting up something called a living trust. Almost anyone can set up a living trust as a part of their estate plan. But the truth is, only a small percentage of people actually need one.
Let’s take a close look at how living trusts work and who needs one.
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
- Fine art and jewelry
- “Virtual” valuable items like mining rights and intellectual property
One of the main benefits of a living trust is that its assets don’t have to go through probate. Living trusts have other benefits too—and we’ll get to those—but first, let’s talk about how trusts work.
How Does a Trust Work?
When you form a trust, your legal title is the grantor (the one who owns the stuff). At that point, you transfer ownership of your 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, remove 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. Makes sense, right?
Next, you need to name a trustee to make sure the instructions in the trust fund are carried out. Maybe the trustee’s a relative. Or you could appoint a professional trustee, usually from a financial institution.
From that trust fund, you can leave a full inheritance to your heirs (called the beneficiaries). You also have the power to require certain conditions that need to be met before beneficiaries can receive items from the inheritance (like a grandchild finishing college before inheriting the car.)
Alright, we’ve answered, How does a trust work? Now let’s focus on how to set one up.
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How to Set Up a Trust
Your smartest move for setting up a trust is to hire an estate planning attorney. But before you hire anyone, you need to figure out a few things. For example:
- Which assets do you want to transfer into your trust?
- Who do you want your successor trustee to be (the person who makes sure everything is transferred properly after your death)?
- Do you want your trust to exist alongside a pour-over will? (A pour-over will ensures that assets automatically transfer to a previously established trust upon death.)
- Who do you want to receive your assets after your death?
Once you make those decisions and work with an attorney to create your trust, the next step is to transfer your assets to the trust. Of course, you’ll probably acquire more stuff (including real estate) as time goes by. Be sure to transfer those assets to your trust too.
Types of Living Trusts
Now let’s take a look at different types of living trusts: revocable trusts, irrevocable trusts, special needs trusts, and charitable trusts.
The revocable trust is by far the most common type. It’s so common that people refer to it simply as a living trust, or a living revocable trust. Just as the name hints, a grantor can change or revoke (cancel) a revocable trust at any time. Revoking a trust is not a quick job. But it is possible, which makes it a flexible option.
The irrevocable trust cannot be changed, even by the grantor. It would take a judge to decide whether the grantor can change an irrevocable trust, 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 revocable and irrevocable living trusts is that when the grantor dies, their revocable trust automatically converts to an irrevocable one anyway (because the only person who could have changed it has passed on).
Special Needs Trust
The special needs trust is for anyone who’s worried about the financial needs of a disabled loved one. The disabled loved one can be anyone with permanent or temporary special needs, someone who may someday have special needs, or anyone who receives government disability assistance.
Because a special needs trust must meet complex requirements set by federal and state disability laws, you should seriously consider consulting a legal expert (aka hiring a lawyer) to make sure it gets done right. It would be tragic to make all the effort and wind up with a trust that disqualifies the disabled person from receiving public assistance.
Thanks to Uncle Sam, you can claim certain tax benefits—depending on the value of contributed assets—if you set up a trust that helps a charity. But to qualify as a charitable trust, the trust must have a specific purpose that qualifies it as a public charity—the requirements are set by the IRS.1
Here’s where it gets more complicated. (It’s OK . . . just breathe with us.) Charitable trusts come in two flavors: a charitable lead trust (CLT) and a charitable remainder trust (CRT).
Without getting into the nitty-gritty, the simplest way to explain the difference between the two types is to say that unlike CLTs, if you place an asset into a CRT, it can be partially tax-deductible right away.2 Got that?
For now, let’s keep it simple and focus on the good stuff—setting up a charitable trust can be a wonderful way to make an impact on a cause you care about.
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:
- Saves time and money in the probate process: Typically, this is the main reason people use a living trust. 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 lower probate costs and more savings.
- 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—which is obviously way harder to pull off than bullying someone into signing a simple will.
- 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:
- 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.
- 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 likely cost a couple grand 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!
- 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 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 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 you (or whoever is the trustee) share it.
- A living trust can’t appoint a guardian for your children. Only a will can do that. So, if you’re a parent, you definitely need a will (with or without a living trust).
- A living trust takes more time and money to set up. There’s more paperwork—and money—involved with a living trust compared to a will. The exact cost varies widely according to your location and your needs.
What Is a Living Trust in Real Estate?
Like we mentioned earlier, you can transfer real estate into a living trust. That means when you pass away, your trustee can avoid a lengthy probate process and immediately distribute the real estate in your trust to your beneficiaries.
Even if you owe money on your real estate (aka your mortgage), you can still transfer it to a trust, and continue focusing on Baby Step 6 by paying off your mortgage.
Now for the nuts and bolts. To put your real estate into a trust, you need to transfer the deed. The easiest way to do this is to work with an attorney—they’ll fill out the deed and make sure everything is properly titled. Remember when we mentioned that there can be a lot of paperwork—and attorney fees—when you set up a trust? We weren’t kidding.
Do I Need a Living Trust?
While there’s not a one-size-fits-all answer, the vast majority of people 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, a simple will works just fine.
Whatever you decide, you’ll want to act now 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.