# What Is a Living Trust?

![Living Trust](https://www.investopedia.com/thmb/q0UUZWklqd_HTEdJGxsOmGxrn5U=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Living_Trust_Final-5e4435785cd2428891684c85a80b00f7.jpg)

*— Investopedia / Candra Huff*

> **Definition**
>
> A living trust is a legal arrangement used in estate planning to hold and protect an individual's assets and direct their distributions after death,

## What Is a Living Trust?

A living trust is a legal arrangement established by an individual, referred to as the grantor, during their lifetime. It protects their assets and directs their distributions after the grantor's death. It's an estate planning tool that can help family members and beneficiaries avoid a lengthy, public, complex, and sometimes costly [probate](https://www.investopedia.com/terms/p/probate.asp) process. A [trustee](https://www.investopedia.com/terms/t/trustee.asp) is designated by the grantor as the individual or entity who will control these assets for the benefit of the beneficiaries at a certain point.

### Key Takeaways

*   A living trust is a legal arrangement used in estate planning that's set up by someone during their lifetime.
*   It designates a trustee and provides explicit directions for the distribution of assets after the grantor's death.
*   Living trusts can be either revocable or irrevocable and differ in terms of tax treatment and flexibility.
*   Individuals may prefer a living trust to a will because a living trust bypasses the probate process.

## How Living Trusts Work

Living trusts are significant in that they allow a trustee to manage the assets in the trust and transfer them to beneficiaries after the grantor’s death. The grantor often acts as trustee of a revocable trust and manages the assets during their lifetime, naming a successor trustee in the trust document to take over management and distribute the assets after their death.

Living trusts begin with the establishment of a trust instrument during the lifetime of the grantor. This is a legal document that lays out the rules and provisions of the trust. Those arranging for a living trust often work with an experienced estate planning professional to ensure proper setup due to the importance and potential complexity of this document.

The grantor decides what [assets](https://www.investopedia.com/terms/a/asset.asp) should be placed in the trust and transfers title to those assets into the trust when it's been created. They're then managed by the grantor or a named trustee who typically has a fiduciary duty to manage the trust prudently and in the best interests of the trust's beneficiaries. The beneficiaries are designated by the grantor when they create the living trust.

These assets flow to the beneficiaries according to the grantor's wishes as outlined in the trust agreement upon the death of the grantor. A living trust itself can be named the beneficiary of certain assets that would otherwise flow directly to the named beneficiary regardless of what's stated in a will.  

A living trust takes effect while the grantor is living, unlike a [will](https://www.investopedia.com/terms/l/last-will-and-testament.asp). The trust doesn't have to go through probate for assets to reach the intended beneficiaries when the grantor dies or becomes incapacitated.

## Assets in a Living Trust

Ownership of assets must be assigned to a living trust to be covered by its terms. They're re-titled to indicate ownership by the trust. Assets that can be assigned to or fund a trust include real estate such as land, commercial property, and homes or financial accounts. They can include personal property such as jewelry, artwork, antiques, or even business interests. Specific financial accounts and items can include:

*   Stock and bond certificates and safe deposit boxes
*   Mutual fund accounts, brokerage accounts
*   Money market accounts, certificates of deposit
*   Checking and saving accounts and cash
*   Money owed to the grantor
*   [Life insurance](https://www.investopedia.com/terms/l/lifeinsurance.asp) policies
*   [Non-qualified](https://www.investopedia.com/terms/q/qualified-annuity.asp) annuities

It's not recommended that you put a 401(k) or IRA in a living trust because the IRS will see it as an early withdrawal if you change the title or ownership structure of an employer-sponsored retirement plan. You'd owe taxes on the amount in your account in the year the assignment takes place and you’d also have to pay a 10% penalty for the early withdrawal if you're younger than age 59½.

## Types of Living Trusts

The two primary types of living trusts are revocable and irrevocable.

### Revocable Trusts

A [revocable living trust](https://www.investopedia.com/articles/pf/06/revocablelivingtrust.asp) is the most common type of living trust. The grantor can act as the trustee and maintain control over the assets placed within it. They maintain the power to change and amend the trust rules at any time. They can change beneficiaries, remove assets, or terminate the trust entirely.

Revocable trusts are often used to protect the assets of the grantor should they become ill or otherwise unable to control them. The individual named as successor trustee will step in and make decisions for the grantor. Revocable living trusts become irrevocable upon the creator's death.

Taxes owed on assets in a revocable trust are still paid by the grantor during their lifetime. Tax rates don't increase just because assets are placed within the trust.

### Irrevocable Trusts

The trust itself owns the assets and the grantor can't designate themself as the trustee of an [irrevocable living trust](https://www.investopedia.com/terms/i/irrevocabletrust.asp). The grantor relinquishes certain rights of control over them and the trust. The trustee effectively becomes the legal owner.

The named beneficiaries are set when the irrevocable trust is created and the grantor can do little to amend that agreement. Trust provisions can only be changed in certain specific situations. Some changes may even require the approval of the courts. You can never take back the assets assigned to an irrevocable living trust.

There are benefits to establishing an irrevocable trust, however. It protects the assets within it from lawsuits and creditors, making them particularly useful to professionals who may be vulnerable to litigation such as doctors or attorneys.

The grantor can also reduce their taxable estate because the trust now owns the assets. They aren't taken into account for eligibility and costs for government programs such as Medicare and Medicaid.

> **Important**
>
> Individuals may find it useful to have both a living trust and a will because they perform different functions. A living trust goes into effect as soon as it's created and it serves to protect the assets it holds while a person is living. A will doesn't go into effect until the individual dies.

## Advantages and Disadvantages of Living Trusts

As with many legal issues, a living trust has its advantages but it has some disadvantages as well.

### Advantages

*   Living trusts offer peace of mind to grantors because their loved ones can avoid the probate process when settling the estate.
*   The distribution of assets after death can occur smoothly, quickly, and without court costs.
*   Your named successor trustee and not the court will manage your assets on your behalf if you become incapacitated and unable to manage the trust's assets yourself.
*   You must still pay taxes related to the assets in a revocable living trust but the tax rate doesn't increase.
*   Living trusts can keep information relating to your estate private.
*   Irrevocable trusts can protect your estate from creditors and legal challenges.

### Disadvantages

*   A grantor loses ownership of and control over assets placed in an irrevocable living trust.
*   Any assets such as real estate to which the grantor owns the title must be transferred with a legal change of the ownership of the title.
*   Title transfer involves filing fees to register title changes.
*   The creation of a living trust may require the help of an estate lawyer and this also involves costs.  
    
*   A living trust normally offers no tax advantages unless it's irrevocable and reduces the size of the grantor's taxable estate. Taxes would otherwise be owed on income generated by assets and on property.

## Living Trust vs. Will

Some significant legal distinctions exist between a living trust and a will.

### Living Trust

A living trust allows you to name beneficiaries and appoint a trustee to manage and distribute trust assets after your death. This lets your family avoid the intrusion of probate for property that's distributed by the trust and other matters related to your estate.

Some individuals establish living trusts simply to avoid probate but they can be more complicated and costly to create than a will.

A living trust can't designate an executor for a will to distribute any assets not included in them and it can't name guardians for minor children. Individuals who create living trusts usually draw up a will as well.

A living trust takes effect immediately when it's created and signed and you can manage, control, and protect your assets throughout your lifetime if the trust is revocable and as long as you remain mentally competent. This control, via your instructions in the living trust document, will extend beyond your death to the distribution of the assets according to your instructions in the living trust document.

### Will

A will is a legal document that names an executor to carry out your wishes after your death. It directs how your assets should be distributed by the executor. It also designates guardians for minor children and includes instructions for other things such as the payment of debts and taxes, debt forgiveness, and funeral arrangements.

The handling of a will and the distribution of assets it bequeaths involves the court-supervised process of probate. This is known to take a great deal of time and be potentially expensive. Matters relating to a will also become public when the probate court becomes involved.

A will isn't a complicated document to create so it's less costly than a living trust. It requires a witness to your signature but no notary public although it's always a good idea to protect it with a notarization as well. It takes effect upon death or incapacitation.

## How to Create a Living Trust

It's a good idea to obtain the assistance of an estate lawyer to establish a living trust but you can take some preparatory steps on your own.

1.  Decide on the type of trust you need: revocable or irrevocable.  
    
2.  Decide on your beneficiaries and the distribution percentages.
3.  Name a trustee who has agreed to administer your living trust after you're gone or during your lifetime as well if the trust is irrevocable.
4.  Complete the living trust document so you can review it with your estate lawyer and sign it in the presence of a notary public.
5.  Fund the trust with the assets you've selected for it.
6.  Keep the original living trust document stored safely such as in a safe deposit box at your bank. Check the contents of the box periodically. Your estate lawyer will probably also retain a copy. Let your trustee know its location and how to access it when necessary.

## Is a Living Will the Same As a Living Trust?

No. A [living will](https://www.investopedia.com/terms/l/livingwill.asp) is a directive written by an individual granting power of attorney and other rights to another trusted individual if they become incapacitated or lose the ability to communicate. A living or [inter vivos](https://www.investopedia.com/terms/i/intervivostrust.asp) trust establishes a legal entity that holds assets that can be distributed to beneficiaries without the necessity of probate after the grantor's death.

## How Much Does a Living Trust Cost?

Establishing a living trust usually requires an attorney. It will probably cost between $1,500 and $3,000 in 2025 depending on the attorney and the complexities of your trust.

## What Are Some Disadvantages of Living Trusts?

The downsides of a trust will depend on whether it's revocable or irrevocable. A [revocable trust](https://www.investopedia.com/terms/r/revocabletrust.asp) isn't sheltered from tax authorities or creditors and this limits its usefulness for protecting assets while the grantor is still alive. An irrevocable trust involves forfeiting all ownership and control of the assets placed inside of it along with very little flexibility in how the trust can be directed after it's established.

## The Bottom Line

A living trust can be a very important legal arrangement for people with assets they want to control and protect during their lifetimes and beyond. It normally provides those who establish and fund them the power to control and benefit from their assets while living and direct how they should be distributed after they've died. Living trusts normally bypass the time-consuming and costly probate process and facilitate the smooth transfer of assets to beneficiaries.

> **Article Sources**
>
> 1.  Cornell Law School Legal Information Institute. "[Successor Trustee](https://www.law.cornell.edu/wex/successor_trustee#:~:text=Successor%20Trustee%20is%20the%20person,trust%20%28called%20the%20Grantor%20%29.)."
>     
> 2.  American Bar Association. "[Revocable Trusts](https://www.americanbar.org/groups/real_property_trust_estate/resources/estate_planning/revocable_trusts/)."
>     
> 3.  Northwestern Mutual. "[Which Assets Belong in a Trust?](https://www.northwesternmutual.com/life-and-money/which-assets-belong-in-a-trust/)"
>     
> 4.  Fidelity. "[Trusts and Taxes: What You Need to Know](https://www.fidelity.com/viewpoints/wealth-management/insights/trusts-and-taxes)."
>     
> 5.  The American College of Trust and Estate Counsel. "[ACTEC Estate Planning Essentials: Can I Change My Irrevocable Trust?](https://www.actec.org/resource-center/video/can-i-change-my-irrevocable-trust/)"
>     
> 6.  American Bar Association. "[Young Lawyers Network: Tax and Non-Tax Considerations when Drafting Irrevocable Trusts](https://www.americanbar.org/groups/real_property_trust_estate/publications/probate-property-magazine/2021/july-august/tax-and-nontax-considerations-when-drafting-irrevocable-trusts/)."
>     
> 7.  American Bar Association. "[Introduction to Wills](https://www.americanbar.org/groups/real_property_trust_estate/resources/estate_planning/an_introduction_to_wills/)."
>     
> 8.  Cabot Wealth Network. "[How Much Does a Living Trust Cost and Is It Worth It?](https://www.cabotwealth.com/daily/personal-finance/how-much-does-a-living-trust-cost-and-is-it-worth-it)"