How To Set Up a Living Trust

It’s not just for people with vast fortunes

Older couple discussing paperwork with an advisor
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A living trust is a legal entity you form to transfer assets upon your death or to manage your assets if you become incapacitated. Most living trusts are revocable. That means you retain control of the assets while you’re still alive and can change the terms of the trust. But some living trusts are irrevocable, meaning the trust can’t be amended or revoked.

One advantage of setting up a living trust is that unlike assets distributed through a last will and testament, property in a living trust typically avoids the probate process. Probate is a court-supervised process that involves the verification and execution of the will after your death. Another benefit of a living trust is that you have more control over how your property is distributed when you die than you might have with a will.

In this article, we’ll cover how to set up a living trust and when it makes sense to do so. We’ll also explain what assets to put in a living trust, as well as the difference between living trusts and living wills.

Key Takeaways

  • Living trusts are often used to avoid probate and to dictate the terms of how your property is distributed upon your death.
  • You can create a living trust using online estate-planning tools or by hiring an attorney, but most people will benefit from working with an attorney.
  • While revocable living trusts are most common, irrevocable trusts can help your beneficiaries avoid estate taxes or shield the assets from creditors.
  • You may choose someone else as your trustee or name yourself, but if you do the latter, you’ll need to designate a successor trustee to manage the trust after you die.
  • If you fail to properly fund a living trust, your assets could still wind up in probate.

Setting Up a Living Trust

A living trust can be a valuable estate-planning tool, but it isn’t always necessary. For example, if your main assets are your 401(k) and bank account, a living trust may not be worth the expense. Retirement accounts avoid probate and pass through beneficiary designation instead. And you can set up your bank account to be payable upon death to your beneficiary.

However, if you’ve got property such as real estate, cars, or jewelry, a living trust may be worth the cost. If you opt to set up a living trust, you’re known as the trust’s grantor. You can appoint a trustee to manage the assets within your trust.

In many circumstances, the grantor also chooses to serve as the trustee, which means they manage the trust’s assets as long as they’re able to.

Here are the steps to follow when you create a living trust.

Decide Whether to DIY It or Hire an Attorney

Many of the top online will makers also offer living trust documents. These may be a decent option if your goals and tax situation are straightforward. They’re also better than nothing if you can’t afford to hire an attorney.

However, it’s usually best to hire a local estate-planning attorney who can draft documents that meet your personal needs.

Online estate documents may be too generic to address state-specific rules, which can vary widely. You also risk making mistakes, such as failing to properly transfer your property to the trust.

Choose What Type of Trust To Create

Next, you’ll need to decide whether you want a revocable trust or an irrevocable trust. A revocable trust, which lets you modify the trust terms and beneficiaries, is a far more common estate-planning tool than an irrevocable trust. A revocable trust is often the better choice because you retain control of trust assets.

However, there are some circumstances in which an irrevocable trust makes sense. For example, because you’re permanently giving part of your estate to someone else, property placed in an irrevocable trust isn’t subject to estate taxes. Because you give up legal rights to the property, an irrevocable trust can also be used to shield assets from creditor claims.

Pick a Trustee

The trustee is the person responsible for managing trust assets. While the grantor can typically serve as the trustee, you can also designate another individual, such as a family member or friend, or an institution such as a bank or trust company.

A professional trustee may charge an annual trust management fee in the range of 0.5% to 2.0% of the assets in the trust. The higher the value of the assets in the trust, the lower the percentage of your assets that will go to the trustee’s fee.

However, if you choose to serve as the trustee, you’ll also need to designate a successor trustee. That person will be responsible for paying creditor claims and taxes when you die. A successor trustee will also ensure the trust property is distributed to your beneficiaries as instructed in the trust document.

Name Your Beneficiaries

Choose a beneficiary who will eventually receive the trust property. You can have multiple beneficiaries. You can also make a charity the beneficiary of a living trust. It’s typically a smart move to name a contingent beneficiary, who will inherit the trust assets only if the primary beneficiary dies, can’t be found, or refuses to inherit the property.

If there is no named beneficiary, a trust’s assets will undergo the probate process.

Prepare the Trust Document

Now you’ll need to prepare the trust document, which is formally known as a declaration of trust. You’ll probably be relying on your attorney or your online estate documents to draft the language. But a declaration of trust will generally include the following information:

  • Names of the trustee and beneficiaries
  • How assets should be distributed to beneficiaries
  • When to end the trust
  • How to manage trust assets
  • When to replace the trustee

Once you’ve prepared the document, you’ll need to sign it and have it notarized to avoid probate challenges. Some states have additional requirements. For example, in Florida, you don’t need to have the trust document notarized, but you need to sign it in the presence of two witnesses who don’t stand to benefit from the trust.

Fund the Trust

Once you’ve signed the trust document, fund the trust by transferring the title of trust property from your name to the trust’s name. If you don’t properly transfer assets to the trust before you die, you’ll lose the benefit of creating the trust, since those assets then may need to go through probate.

Find a Safe Place for Storage

As with any legal document, you’ll need a safe place to store the declaration of trust. Options include a safe deposit box at a bank, your attorney’s office, or a fireproof lockbox in your home. Make sure your successor trustee knows where it’s located and can easily access it.

When To Set Up a Living Trust

A living trust isn’t always necessary. Depending on your state’s laws, if your estate is small enough, it could qualify for a simplified execution process instead of a lengthy probate process involving the courts. In Illinois, for example, estates valued at less than $100,000 can avoid the court process, while in Florida, estates worth $75,000 or less can bypass probate.

The decision of when to set up a living trust often boils down to your family situation. A living trust often makes sense when you want to leave assets to minor children. Although a guardian will manage the money until the child reaches the age of majority, which is 18 in most states, many people don’t like the idea of a child or grandchildren receiving a large sum of money as soon as they turn 18. A living trust lets you specify when the child should get the money.

Living trusts are also useful in subsequent marriages when each spouse wants to leave property to children from a previous marriage, as well as their spouse.

Some people set up irrevocable living trusts to shield assets from estate taxes. However, estate taxes aren’t something that the majority of Americans need to worry about. In 2022, the first $12.06 million of a person’s estate is exempt from estate taxes. For married couples, the combined exemption is $24.12 million.

What Assets To Put in a Living Trust

The types of assets that go in a living trust are those that would typically be transferred through probate. Non-probate property, such as retirement accounts, life insurance policies, and jointly held assets, don’t belong in a living trust.

Assets that you can place in a living trust include real estate, bank accounts, non-retirement investment accounts, motor vehicles, and any property included in a will. A living trust can be especially useful when you own real estate in multiple states because the property would otherwise need to go through each state’s probate procedure.

Living Trusts vs. Living Wills

Living trusts and living wills are both important estate-planning documents, but they have different purposes. The main difference between a living will and a living trust is that a living trust is used to determine how your property will be distributed when you die, while a living will provides instructions to your doctors for what medical treatments you’d want at the end of your life.

For example, you could use a living will to indicate whether you want CPR if your heart stops, or if you wish to be fed through a tube or placed on a ventilator. Some people use a living will to spell out instructions for pain management or whether they want to be an organ donor.

 Living Trust  Living Will
Governs how your property will be distributed if you die or become incapacitated Provides instructions for end-of-life medical care
Allows you to retain control of your assets unless you create an irrevocable trust Typically used when you can’t communicate your wishes
Bypasses probate when you die Becomes null and void when you die

Frequently Asked Questions (FAQs)

How much does it cost to set up a living trust?

A revocable living trust generally will cost between $1,500 and $2,500 to set up through an estate planning attorney, according to ContractsCounsel data. But costs can vary widely depending on where you live, the attorney’s experience, and the complexity of your estate. For instance, you may pay more if you have many different assets that need to be retitled or specific instructions for how you want your property distributed. Some online services offer free living trust documents, while some charge several hundred dollars.

Why would someone want to set up a living trust?

One common reason you’d want to set up a living trust is to avoid probate. Another reason is to have greater control over how your property is distributed. For example, if the beneficiary is relatively young or has a history of mismanaging money, you may want to set up a living trust so that someone else will manage the money for their benefit.

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Article Sources

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