Living trust – a term most of us only pretend to understand when it comes up in conversation. It’s uh…something that helps rich people avoid taxes? 😬 Well, buckle up! This primer will prepare you to talk your way through even the driest of company dinner parties, and help you decide if a living trust is something you should consider as part of your own plan. You in five minutes: “Inter-vivos you say? I can tell you all about that!”
First thing’s first. What is a living trust?
The official legalese explanation:
A living trust is an estate planning vehicle that places certain assets “in trust” during your lifetime and describes how those assets should be distributed upon your death. You’re still able to access and use the property that’s in your trust, including selling, renting, or disposing of it, and generally can revoke or amend your trust at any time before your death. Unlike a will, which becomes public upon your death, a living trust is a private document and its terms remain confidential. It is inter-vivos, meaning it is created during your lifetime (as opposed to a testamentary trust, which is created upon your death).
And now in plain English:
A living trust is a legal device that is created to hold your property while you’re alive and used to ensure that your assets go directly to the right people or organizations after your death.
For example: Great Uncle Gerry has a condo in New York and a house and speedboat in Florida. He puts all of those assets into his living trust. During his lifetime, Uncle Gerry is able to continue living in his condo and renting out his Florida house to Airbnb-ers. After he dies, his property is transferred to his favorite niece Julia, who as the beneficiary of his trust, gets to work through her grief jetting around the Keys.
Why do people create living trusts?
Contrary to popular belief, a living trust does not reduce taxes or protect your assets from creditors (womp womp). Don’t shoot the messenger. So, why do it?
The main benefit of creating a living trust (rather than only a will) is to avoid probate. Probate is the annoying judicial process that happens after your death to locate and distribute your property. The probate court determines whether a valid will was in place, takes inventory of your assets and debts, officially appoints and empowers the executor of your estate, and manages any legal disputes that may come up. It can be time-consuming and expensive, and can take months or even years to resolve. Thank you, next. Amirite?
BUT – assets that are placed in a living trust aren’t subject to probate. That’s because when you die, only the property you own has to go through probate – and remember from our legalese class that anything you put in your living trust won’t technically belong to you anymore. Rather, the assets are held in the name of the trust. Win!
If probate doesn’t sound that bad to you, just look at what happened to Prince and Aretha Franklin who both died without a trust or a will! Fail.
How do you make a living trust?
Fortunately for us, the steps are actually fairly straightforward.
- First, set up the trust by drafting a Declaration of Trust document (this can be done on your own or through an attorney — and coming soon, with Qwill!). The document generally includes the following details:
- (1) the name of the person creating the trust (the “grantor”);
- (2) the person(s) who will manage the trust (first you as trustee, and then a successor trustee after you die);
- (3) the list of assets that are to be owned by the trust; and
- (4) the beneficiaries who will receive those assets after you die.
- Next, sign and get that Declaration of Trust notarized.
- Lastly, you must “fund” the trust by transferring ownership of your property into the name of the trust. More on that in a bit.
For example. Let’s revisit Great Uncle Gerry and his favorite niece, Julia. In our example, Uncle Gerry is the grantor and the original trustee. After creating his living trust through a Declaration of Trust, he transfers the title to his New York condo, Florida house, and speedboat into the name of the trust. Those goodies are then owned by the trust during his lifetime, and transfer to his beneficiary, Julia, after his death.
How do you fund a trust?
How you “fund” your trust depends on the type of assets you’re transferring into its ownership.
Property without a title document (like jewelry, clothes, bikes, and other personal belongings, etc) can be transferred by simply listing it on a Notice of Assignment.
To transfer property that has a title or ownership document (like a house, car, stocks, or bank accounts), you’ll need to create a new title document showing the property is owned in the name of the trust. Quick tips on how to do so:
- Real estate: Create a new deed in the name of the trust and “record” or file it at your local land records office.
- Financial and brokerage accounts: Re-name the account or start a new account in the name of the trust.
More detailed information on funding your trust can be found here.
I’m not rich, do I need a living trust?
The million dollar question! And if you don’t have a million dollars, you might be wondering whether you need a trust at all. Honestly, it depends.
Compared to a Last Will and Testament, the process for creating (and funding) a trust is more time consuming, and can be expensive. After you create a living trust, it may also be more difficult to modify or amend than your will.
So – is a living trust worth the trouble? Consider the following:
- The size of your estate: The wealthier you are, the more money you can save by avoiding probate. This is because probate is longer and more expensive for those with large or complex estates.
- The type of assets that you own: If you own a small business or other type of asset that you can’t afford to have tied up in probate, a living trust could be a helpful tool. Similarly, if you own property that is out of state, a living trust may help your heirs avoid having to go through probate in another state (since most real estate must be probated in the state in which it’s located).
- Your age: The younger you are, the more likely you’ll need to make significant changes or amendments to your estate plan. If that’s the case, a will may be a better choice than a living trust.
- Your enemies: JK! But seriously, consider whether or not your wishes may be challenged by your beneficiaries after your death. If you’re disinheriting a child or have family that doesn’t get along, then a living trust may be beneficial, as they’re harder to contest than wills.
And that’s all, folks! Hopefully the basics of living trusts have been demystified for you. Happy planning!
Let Qwill guide you.
If you’re still on the fence about creating a living trust, sign up for our newsletter at the bottom of our website. We’re creating a streamlined process for setting up your living trust, and our newsletter subscribers will be the first to know when it’s ready.
Alicia is a fearless legal warrior who proudly notes that – during her very first oral argument in court – she defeated a team of opposing counsel who had a combined total of > 100 years of litigation experience (take that patriarchy!). Before joining Qwill as Director of Ops and Legal, Alicia spent five years representing consumers in cases involving privacy rights, false advertising, and consumer fraud. She’s passionate about meditation, self-actualization, and improving the world.