What is a Living Trust?
Updated: Jul 17, 2023
A trust is a document that you create that allows you to transfer ownership of your assets to a trustee, who will manage them on behalf of your heirs. Unlike a will, a living trust takes effect immediately, and you can revoke or amend it anytime during your lifetime. A “Living Trust” is one type of trust. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.
Basic Types of Trusts
Testamentary
Outlined in a will and created through the will after the death, with funds subject to probate and transfer taxes; often continues to be subject to probate court supervision thereafter
Revocable (“Living”) Trust
Also known as a living trust, a revocable trust can help assets pass outside of probate, yet allows you to retain control of the assets during your (the grantor's) lifetime. It is flexible and can be dissolved at any time, should your circumstances or intentions change. A revocable trust typically becomes irrevocable upon the death of the grantor.
Asset Protection Trust
An asset protection trust holds an individual's assets with the purpose of shielding them from creditors, including nursing homes and long term care providers. They also prevent the home from disqualifying the individual for Medicaid and protects the home from being sold to pay for long-term care. Asset protection trusts offer the strongest protection you can find from creditors, lawsuits, or any judgments against your estate.
Life Insurance Trust
Irrevocable trust designed to exclude life insurance proceeds from the deceased’s taxable estate while providing liquidity to the estate and/or the trusts' beneficiaries
Charitable Trust
Allows certain benefits to go to a charity and the remainder to your beneficiaries OR Allows you to receive an income stream for a defined period of time and stipulate that any remainder go to a charity
Common Benefits of Trusts
One big benefit is that assets in a trust avoid the probate process. Probate is a court-supervised process of validating your will, appointing an executor to administer your estate and transferring ownership of your assets to your beneficiaries. If it sounds complicated, that’s because it is. As a result, probate often takes at least a year to complete and can be quite expensive with high court and attorneys fees. Since assets in a trust avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Additionally, your family will save time, court fees, and potentially reduce estate taxes as well.
Other benefits of trusts include:
Control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
Protection of your legacy. A properly constructed trust can help protect your estate from your heirs' creditors or from beneficiaries who may not be adept at money management.
Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.
Revocable vs. irrevocable
There are many types of trusts; a major distinction between them is whether they are revocable or irrevocable.
Revocable Trust
Also known as a living trust, a revocable trust can help assets pass outside of probate, yet allows you to retain control of the assets during your (the grantor's) lifetime. It is flexible and can be dissolved at any time, should your circumstances or intentions change. A revocable trust typically becomes irrevocable upon the death of the grantor.
You can name yourself trustee (or co-trustee) and retain ownership and control over the trust, its terms and assets during your lifetime, but make provisions for a successor trustee to manage them in the event of your incapacity or death.
Although a revocable trust may help avoid probate, it is usually still subject to estate taxes. It also means that during your lifetime, it is treated like any other asset you own.
Irrevocable Trust
An irrevocable trust typically transfers your assets out of your (the grantor's) estate and potentially out of the reach of estate taxes and probate, but cannot be altered by the grantor after it has been executed. Therefore, once you establish the trust, you will lose control over the assets and you cannot change any terms or decide to dissolve the trust.
An irrevocable trust is generally preferred over a revocable trust if your primary aim is to reduce the amount subject to estate taxes by effectively removing the trust assets from your estate. Also, since the assets have been transferred to the trust, you are relieved of the tax liability on the income generated by the trust assets (although distributions will typically have income tax consequences). It may also be protected in the event of a legal judgment against you.
Deciding on a Trust
Choosing and creating a trust can be a complex process; the guidance of an attorney with estate planning expertise is highly recommended. If you are interested in speaking with one of our estate planning and elder law attorneys, contact us here or call us at 412-391-1014 to schedule an appointment.
Want to know more about trusts? Join us for our next Trusts 101 webinar where we discuss trusts in more depth.