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.

How to Set Up a Living Trust

Creating a living trust doesn’t have to be overwhelming. While it involves several legal steps, the process is manageable if you break it down into clear stages:

Take Inventory of Your Assets. Start by making a list of all the assets you want to place in the trust. This may include real estate, bank accounts, investments, vehicles, valuable personal property and more. Decide whether you want to include all major assets or only certain ones.
Decide on the Type of Trust. Choose between a revocable or irrevocable living trust. A revocable trust gives you the flexibility to make changes later, while an irrevocable trust offers less control but may provide certain legal or tax protections.
Choose a Trustee. You can serve as your own trustee, or appoint someone you trust — such as a family member, friend or professional fiduciary. You’ll also need to name a successor trustee who will manage the trust after your death or if you become incapacitated.
Name Your Beneficiaries. Decide who will receive the assets held in the trust. You can name individuals, organizations or charities as beneficiaries. Be as specific as possible, and consider contingencies in case your primary beneficiaries are unable to inherit.
Draft the Trust Document. The trust agreement outlines all terms, including who manages the trust, how assets are distributed and under what conditions. While online templates exist, working with an estate planning attorney ensures the document complies with your state’s laws and reflects your wishes.
Transfer Assets Into the Trust. This step is critical; simply creating the trust document isn’t enough. You must formally transfer ownership of each asset into the trust. This could involve retitling property deeds, updating account ownership forms or changing beneficiary designations.
Keep the Trust Updated. Review your trust regularly and make updates as needed. Major life changes like marriage, divorce, birth of a child or a move to another state may require adjustments to your trust documents.

Living Trusts and Taxes

Living trusts offer many estate planning advantages, but tax savings aren’t always one of them. It’s important to understand how different types of taxes apply.

Income Taxes

If you create a revocable living trust, you’re still considered the owner of the assets for tax purposes. That means income generated by the trust’s assets — like dividends, interest or rental income — continues to be reported on your personal tax return. There’s no special tax treatment while you’re alive.

If the trust becomes irrevocable, the situation changes. The trust itself may need to file its own tax return and pay taxes on any income, depending on how it’s structured. However, irrevocable trusts are more complex and often used in more advanced estate planning.

Estate Taxes

A revocable living trust does not reduce the size of your taxable estate. The assets in the trust are still counted as part of your estate when calculating federal estate tax liability. An irrevocable trust, on the other hand, may help reduce your taxable estate because the assets are no longer under your control. That said, this strategy must be carefully planned to comply with IRS rules.

Gift Taxes

Transferring assets into a revocable living trust generally doesn’t trigger gift taxes because you retain control. However, transfers to an irrevocable trust may be treated as taxable gifts if the beneficiaries have immediate access or rights to the trust assets.

In short, while living trusts are great tools for probate avoidance and managing your estate, they don’t automatically provide tax breaks. It’s a good idea to speak with a financial advisor or estate planning attorney if minimizing taxes is a primary goal.

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 mother and daughter embrace, having set up a living trust for the daughter's future.

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

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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.