What is a Living Trust?

So, just exactly what is a living trust?

Good question.

A trust is the legal entity that someone (called a settlor, grantor or trustor) transfers assets to, so that it can be administered by a trustee for someone’s (beneficiary’s) benefit. The settlor, trustee, and beneficiary can all be the same person.

The term "Living Trust" (or "Inter Vivos" Trust) means that the trust was created and took effect during the settlor’s life. This is in contrast to a testamentary trust, that is created by a will, and does not become effective until after the death of the person who created it (the testator).

Some people confuse a living trust with a living will. The two documents are entirely different things. You can read more about living wills (also called an "advanced medical directive") at living wills in estate planning.

living trust

Most commonly, a "living trust" is really another term for a Revocable Living Trust. That means it is a trust established during the life of the settlor that he or she can revoke or amend at any time.

It is common for the settlor, trustee and beneficiary of a living trust to be the same person at first. In other words, you could put your assets in a living trust, serve as the trustee, and use the trust assets to pay your personal bills. Often, husband and wife are co-trustee’s.

If you come across a term you don't understand, check out
Living Trust Definitions

Many people are understandably reluctant to re-title assets in the name of their living trust. They are afraid they will no longer "own" them. It is true that the assets will no longer be in their name. However, they will still control the trust and therefore continue to control the assets. In fact, the settlor is free to revoke the revocable living trust at any time.

Normally, the living trust document will provide for successor trustees in case of incapacity or death and also provide for an ultimate plan of distribution. One of the advantages of a living trust is the control and continuity it offers in being able to use the same trust to manage your assets while living and continue to manage them or distribute them after your death. Here's a great article about how to pick a trustee.

If funded during your life, the assets can be transferred, after your death, to your heirs -- outside of probate. Probate can be lengthy and expensive, so avoiding it is one of the most common reasons people get living trusts and one of their biggest advantages.

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However, there are other ways to avoid probate (see Joint Ownership) and also disadvantages of funding a living trust during your lifetime. And, there are other important advantages and disadvantages of living trusts.

It is also possible to establish a "living trust" that is irrevocable. This is almost always done for tax reasons. [See Irrevocable Living Trust.] It is important that your trust explicitly state whether it is revocable or irrevocable as there will be very different consequences resulting from that choice.

To summarize, the living trust is a flexible and powerful tool. In fact, it is probably the most significant tool an estate planner has. However, it's not for everyone.

Oh, and a living trust is definitely not a substitute for a will.

Now that you know what a living trust is, check out Estate Planning and Living Trusts to find out more.

For the reasons discussed in the video above and also at my probate story -- I now generally recommend folks get a living trust and fund it. That is, assuming they have probate assets.

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