Living Trust

What Is a Living Trust?

A living trust is a legal document, or trust, created during an individual's lifetime (the trustor or grantor) where a designated person, the trustee, is given responsibility for managing that individual's assets for the benefit of the eventual beneficiary. A living trust is designed to allow for the easy transfer of the trust creator or settlor's assets while bypassing the often complex and expensive legal process of probate.

Living trust agreements designate a trustee who holds legal possession of assets and property that flow into the trust.

Key Takeaways

  • A living trust designates a trustee to manage assets for the beneficiary, while the grantor is still alive.
  • Trustees with fiduciary duty manage trusts according to the beneficiary's best interests.
  • Living trusts can be either irrevocable or revocable, which differ greatly from one another in terms of tax treatment and flexibility.
  • Trusts are sometimes preferred over a will in that they can avoid the probate process.

How Living Trusts Work

Living trusts are managed by a trustee who typically has a fiduciary duty to manage the trust prudently in the best interests of the trust's beneficiary or beneficiaries designated by the trust settlor, also called a grantor. Upon the death of the settlor, these assets flow to the beneficiaries according to the grantor's wishes as outlined in the trust agreement.

Unlike a will, however, a living trust is in effect while the settlor is alive and the trust does not have to clear the courts to reach its intended beneficiaries when the settlor dies or becomes incapacitated.

Types of Living Trusts

Living trusts can be irrevocable or revocable. With a living revocable trust, the trust settlor can designate himself or herself as the trustee and take control of assets within the trust. However, this stipulation means the assets in the trust remain a part of the trust settlor's estate, meaning the individual may still be liable for estate taxes should the estate be valued beyond the estate tax exemption at the time of death. The trust settlor also has the power to change and amend trust rules at any time. This means the trust settlor is free to change beneficiaries or undo the trust altogether.  

With an irrevocable living trust, the settlor relinquishes certain rights to control over the trust. The trustee effectively becomes the legal owner, but the individual would also reduce their taxable estate. Once the trust agreement for an irrevocable living trust is made, the named beneficiaries are set and the settlor can do little to amend that agreement. 

Asset Assignment Within Living Trusts

A living trust itself can be named the beneficiary of certain assets which would otherwise flow directly to the named beneficiary regardless of what is stated in a will. These include employer-sponsored retirement accounts such as 401(K)s, individual retirement accounts (IRAs), life insurance policies, and certain bank accounts such as Payable on Death (POD) accounts. Living trusts can include accounts held in trust, which are created during the settlor's lifetime and are not established upon death as designated in a last will and testament. 

Is a Living Will the Same as a Living Trust?

No. A living will is a directive written by an individual granting power of attorney and other rights to a trusted other if that individual becomes incapacitated or loses the ability to communicate. A living (or intervivos) trust establishes a legal entity (the trust), which holds assets that can be distributed without probate to beneficiaries after one's death.

How Much Does a Living Trust Cost?

Establishing a living will usually require an attorney. According to Legal Zoom, in the U.S. a revocable living trust will cost, on average, $1,000-$1,500 for an individual and $1,500-$2,000 or more for a couple. Because of their greater complexity, an irrevocable trust may often cost more. These costs will vary by location and from law firm to law firm.

What Are Some Disadvantages of Living Trusts?

The downsides of trusts, aside from their cost, will depend on whether it is a revocable or irrevocable trust—each of which serves its own purpose. A revocable trust is not sheltered from tax authorities or creditors, which limits its usefulness as a way to protect assets while one is still alive. An irrevocable trust involves forfeiting all ownership and control of the assets put inside of it, along with very little flexibility in how the trust can be directed after it is established.

Article Sources
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  1. American Bar Association. "Living or revocable trust."

  2. Internal Revenue Service "estate tax."

  3. Legal Zoom. "What Is the Average Cost to Prepare a Living Trust?"

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