How To Set Up a Living Trust

A living trust is a legal entity you form to transfer assets upon your death or to manage your assets if you become incapacitated. Most living trusts are revocable. That means you retain control of the assets while you’re still alive and can change the terms of the trust. But some living trusts are irrevocable, meaning the trust can’t be amended or revoked.

One advantage of setting up a living trust is that unlike assets distributed through a last will and testament, property in a living trust typically avoids the probate process. Probate is a court-supervised process that involves the verification and execution of the will after your death. Another benefit of a living trust is that you have more control over how your property is distributed when you die than you might have with a will.

In this article, we’ll cover how to set up a living trust and when it makes sense to do so. We’ll also explain what assets to put in a living trust, as well as the difference between living trusts and living wills.

Setting Up a Living Trust

A living trust can be a valuable estate-planning tool, but it isn’t always necessary. For example, if your main assets are your 401(k) and bank account, a living trust may not be worth the expense. Retirement accounts avoid probate and pass through beneficiary designation instead. And you can set up your bank account to be payable upon death to your beneficiary.

However, if you’ve got property such as real estate, cars, or jewelry, a living trust may be worth the cost. If you opt to set up a living trust, you’re known as the trust’s grantor. You can appoint a trustee to manage the assets within your trust.

Here are the steps to follow when you create a living trust.

Decide Whether to DIY It or Hire an Attorney

Many of the top online will makers also offer living trust documents. These may be a decent option if your goals and tax situation are straightforward. They’re also better than nothing if you can’t afford to hire an attorney.

However, it’s usually best to hire a local estate-planning attorney who can draft documents that meet your personal needs.

Choose What Type of Trust To Create

Next, you’ll need to decide whether you want a revocable trust or an irrevocable trust. A revocable trust, which lets you modify the trust terms and beneficiaries, is a far more common estate-planning tool than an irrevocable trust. A revocable trust is often the better choice because you retain control of trust assets.

However, there are some circumstances in which an irrevocable trust makes sense. For example, because you’re permanently giving part of your estate to someone else, property placed in an irrevocable trust isn’t subject to estate taxes. Because you give up legal rights to the property, an irrevocable trust can also be used to shield assets from creditor claims.

Pick a Trustee

The trustee is the person responsible for managing trust assets. While the grantor can typically serve as the trustee, you can also designate another individual, such as a family member or friend, or an institution such as a bank or trust company.

However, if you choose to serve as the trustee, you’ll also need to designate a successor trustee. That person will be responsible for paying creditor claims and taxes when you die. A successor trustee will also ensure the trust property is distributed to your beneficiaries as instructed in the trust document.

Name Your Beneficiaries

Choose a beneficiary who will eventually receive the trust property. You can have multiple beneficiaries. You can also make a charity the beneficiary of a living trust. It’s typically a smart move to name a contingent beneficiary, who will inherit the trust assets only if the primary beneficiary dies, can’t be found, or refuses to inherit the property.

Prepare the Trust Document

Now you’ll need to prepare the trust document, which is formally known as a declaration of trust. You’ll probably be relying on your attorney or your online estate documents to draft the language. But a declaration of trust will generally include the following information:

• Names of the trustee and beneficiaries
• How assets should be distributed to beneficiaries
• When to end the trust
• How to manage trust assets
• When to replace the trustee

Once you’ve prepared the document, you’ll need to sign it and have it notarized to avoid probate challenges. Some states have additional requirements. For example, in Florida, you don’t need to have the trust document notarized, but you need to sign it in the presence of two witnesses who don’t stand to benefit from the trust.

Fund the Trust

Once you’ve signed the trust document, fund the trust by transferring the title of trust property from your name to the trust’s name. If you don’t properly transfer assets to the trust before you die, you’ll lose the benefit of creating the trust, since those assets then may need to go through probate.

Find a Safe Place for Storage

As with any legal document, you’ll need a safe place to store the declaration of trust. Options include a safe deposit box at a bank, your attorney’s office, or a fireproof lockbox in your home. Make sure your successor trustee knows where it’s located and can easily access it.

When To Set Up a Living Trust

A living trust isn’t always necessary. Depending on your state’s laws, if your estate is small enough, it could qualify for a simplified execution process instead of a lengthy probate process involving the courts. In Illinois, for example, estates valued at less than $100,000 can avoid the court process, while in Florida, estates worth $75,000 or less can bypass probate.

The decision of when to set up a living trust often boils down to your family situation. A living trust often makes sense when you want to leave assets to minor children. Although a guardian will manage the money until the child reaches the age of majority, which is 18 in most states, many people don’t like the idea of a child or grandchildren receiving a large sum of money as soon as they turn 18. A living trust lets you specify when the child should get the money.

Some people set up irrevocable living trusts to shield assets from estate taxes. However, estate taxes aren’t something that the majority of Americans need to worry about. In 2022, the first $12.06 million of a person’s estate is exempt from estate taxes. For married couples, the combined exemption is $24.12 million.

What Assets To Put in a Living Trust

The types of assets that go in a living trust are those that would typically be transferred through probate. Non-probate property, such as retirement accounts, life insurance policies, and jointly held assets, don’t belong in a living trust.

Assets that you can place in a living trust include real estate, bank accounts, non-retirement investment accounts, motor vehicles, and any property included in a will. A living trust can be especially useful when you own real estate in multiple states because the property would otherwise need to go through each state’s probate procedure.

Living Trusts vs. Living Wills

Living trusts and living wills are both important estate-planning documents, but they have different purposes. The main difference between a living will and a living trust is that a living trust is used to determine how your property will be distributed when you die, while a living will provides instructions to your doctors for what medical treatments you’d want at the end of your life.

For example, you could use a living will to indicate whether you want CPR if your heart stops, or if you wish to be fed through a tube or placed on a ventilator. Some people use a living will to spell out instructions for pain management or whether they want to be an organ donor.

Frequently Asked Questions (FAQs)

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