A trust is a legal arrangement where a person or company (the trustee) has the legal title to property for another person. If you set up a trust while you are still alive, this is called a living trust.
The trustee has legal rights of management and is expected to manage the trust assets for your benefit during your lifetime. Upon your death, the trustee is expected to carry out your wishes as outlined in the trust – similar to the executor of a will.
Trusts can be revocable, meaning that you can change your mind and revoke the trust anytime while you are still competent; or irrevocable, meaning the asset change is permanent. Most trusts are revocable. Revocable trusts are generally used to avoid probate (i.e., state intervention when you die); irrevocable trusts are used mainly for portions of very large estates to avoid estate taxes (as revocable living trusts do not affect estate taxes).
You can create a basic living trust for yourself using online resources, but if you are not confident doing so or have complex circumstances, select a qualified attorney to create one for you. Tax situations with certain assets can be highly complex, so be wary of simple, one-size-fits-all approaches.
The basic steps in creating a living trust are:
- Choose a Trust and Assets to Cover – The trust may be joint (for jointly owned property) or individual. You must decide and explicitly state which assets you wish to cover – normally houses, bank accounts, investments, and similar large assets.
- Decide Beneficiaries and Trustees – You can appoint any person or group to be your trustee, but most people establish a living trust with themselves as the trustee (including a successor trustee to distribute your assets after death). By doing this, you retain control of your assets and your heirs avoid probate for all assets covered by the trust.
- Create the Trust Document – Create the trust document outlining the above items, and the details of your wishes to be carried out upon your death. Make sure that it is signed and notarized.
- Transfer Assets – This is extremely important; without transferring assets, your living trust has little value. Your assets must be transferred to the trustee in a process known as "funding the trust.” Ownership transfer is required for deeds for real estate, stocks and bonds, bank accounts and any other assets to be covered. It is best to seek professional advice on tax ramifications before transferring financial vehicles such as a 401(k), IRA, or life insurance designation. Upon your death, your trustee transfers ownership to all beneficiaries named in the trust, and then the trust ceases to exist.
Living trusts do not eliminate debts – heirs are still liable for payments. However, living trusts are not public record, so debtors may not know who is responsible for paying the debt.
It is also wise to have a will to cover any property that you did not transfer as trustee. If you want newer property to be covered under the living trust, you must explicitly transfer ownership to the trust.
Do you need a living trust? For most people, a will serves their needs just fine. Living trusts are primarily for wealthier people with greater estate values and those who are older (and are likely to pass away within five to ten years), or those with very complex financial or personal situations such as extended families, properties in multiple states, etc. Their primary purposes are ease of transfer upon death, avoiding probate, and retaining privacy. Consult an estate-planning professional to best determine if a living trust is right for you.