Should you establish a living trust? Here's what to consider.

While the phrase “trust fund” often evokes images of extreme wealth, living trusts are in fact a frequently used estate planning tool. A 2020 survey found that 13% of respondents had a living trust (to compare, only 32% of respondents had a will or other estate planning document). This piece aims to demystify living trusts and examine both their advantages and their disadvantages.

In short, a living trust is a collection of assets such as real estate, bank accounts, and vehicles. The person establishing the trust, known as the “settlor” or “grantor,” establishes the trust while they are alive (which is why the trust is described as “living”), transferring ownership of the property from themselves to the trust.

The grantor then proceeds to name a trustee, the person responsible for managing the assets within the trust (generally, but not always, the grantor themselves), as well as a successor trustee, who is the person responsible for administering the trust after the death or incapacitation of the grantor. The successor trustee is generally a relative or a member of a financial institution. Additionally, the grantor names individuals and/or organizations who will inherit the assets within the trust: these individuals and entities are known as “beneficiaries.”

A living trust may be revocable or irrevocable. The terms of a revocable living trust can be modified at any time: the grantor may choose to add or remove beneficiaries or even revoke the entire trust. Given that the grantor has absolute control over assets within the trust, creditors are still able to take these assets if the estate owes money at the time of death.

Conversely, an irrevocable living trust cannot be modified after the trust agreement has been signed and the assets have been transferred to the trust (a process known as “funding the trust”). The trustee is unable to manage trust assets, and these trust assets cannot be removed from the trust. Importantly, a revocable living trust becomes an irrevocable living trust after the death of the grantor.

The primary benefit associated with establishing a trust is the ability to avoid probate. Probate, the legal proceeding in which an estate’s assets are distributed to inheritors, is a months- to year-long process that can involve significant legal fees.

Assets in a living trust do not pass through probate. Instead, the successor trustee directly transfers assets to beneficiaries based on the conditions of the trust contract. This process generally takes weeks, and does not automatically involve legal fees.

Another additional benefit of a living trust is the preservation of estate privacy. When a will proceeds through probate, the will becomes a publicly available document. Conversely, trust assets are never publicly disclosed, thereby protecting the privacy of the grantor and their family.

It is important to note that a living trust is not a substitute for a will. Any property not transferred to and accounted for in the living trust must be addressed within a will. For example, if the grantor purchased a piece of real estate before death and failed to transfer the deed to the living trust, the property would end up in the will. Depending on the value of assets within the will, the will may have to pass through probate.

While living trusts greatly benefit some families, they are unnecessary for others. Living trusts are generally more expensive to establish, manage, and fund compared to wills. And if your goal is simply to avoid probate, there may be ways to transfer assets without using a living trust, depending on your state laws.

Ultimately, an attorney whom you can familiarize with your circumstances and estate planning goals may be best able to determine whether a living trust is the correct estate planning tool for you. For help finding an attorney that is right for you, use our refined search tool by clicking here.

— Jon Scalabrini