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What Is a Living Trust and How to Set One Up

By Rebecca Lake

living trustHave you ever thought about who would manage your family’s finances if you were incapacitated because of an illness or injury? Is writing a will still on your to-do list? When it comes to your financial well-being, you can’t afford to wait to begin preparing for the future.

Building a comprehensive estate plan starts with identifying what tools you’ll need. While a will takes care of your assets after you die, a living trust can help you manage your assets more effectively during your lifetime and beyond.

How a Living Trust Works

A living trust, also known as an “inter vivos trust,” is a legal document that spells out how you want your assets to be handled prior to and after your death. The person who makes the trust is called the settlor or grantor. The person who manages the assets in the trust is called the trustee.

You can act as the trustee and name a successor who will take over after your death. If you don’t feel comfortable managing the trust yourself, you can choose someone else to serve as trustee. The purpose of the trust is to provide for your beneficiaries, which may include your spouse, children, siblings, or anyone else you plan to leave your estate to.

Setting Up a Trust

Establishing a living trust is a two-step process. First, you create the deed of trust or trust agreement. You can do this yourself using an online resource like LegalZoom. If you don’t feel comfortable creating a trust on your own, a qualified estate planning attorney can help you through the process.

Setting up a trust on your own is less expensive, and may be appropriate if your estate is relatively small. A basic living trust package from LegalZoom starts at $249. However, if you have substantial assets, own a business, or your estate is complex, hiring an attorney is advisable, but it could end up costing you $1,000 or more.

Funding the Trust

Once the trust is created on paper, you have to fund it. This simply means transferring any assets you want included in the trust to the control of the trustee. For example, you can transfer real estate, boats, bank accounts, stocks, bonds, artwork, antiques, stamp collections, coin collections, or any other asset of value to the living trust.

Transferring real estate typically involves retitling the property. This is done by establishing a new deed for the property in your trustee’s name. For intangibles, such as bank accounts or stocks, you can either transfer the account ownership to the trustee or open a new account in the trustee’s name, depending on the financial institution’s policies.

a living trust can help protect your family

When You Need a Living Trust

If you don’t have a lot of assets, then a will alone may be sufficient to handle your estate planning needs. A living trust is completely separate from a will and is designed to supplement it, not replace it.

There are certain scenarios where establishing a trust can provide added benefits beyond what a will can do:

  • If You Want to Avoid Probate. Probate refers to the legal process wherein your assets are distributed based on the instructions in your will (or according to state inheritance laws if you die intestate). Probate can take months or even years to complete if you have a large estate or your beneficiaries contest the terms of your will. Probate fees are deducted from your estate before your assets are distributed, and the contents of your will become a matter of public record. Depending on how complex your estate is, probate can cost you hundreds or even thousands of dollars in attorneys’ fees and court costs. A living trust allows you to avoid probate for those assets included in the trust, reduce your overhead expenses, and give your beneficiaries a greater degree of privacy.
  • If You Have Young Children. While no one wants to think about dying, you need to know that your children will be taken care of should something happen to you and your spouse. A living trust gives you the power to name both a legal guardian and a conservator for minor children. A legal guardian is responsible for day-to-day care, and a conservator takes care of their finances until they reach adulthood. You can use a will to name a guardian or conservator, but he or she is typically subject to court supervision. If you leave money to children in a will, they’re eligible to receive their inheritance once they reach the age of majority. With a living trust, the conservator is not under the court’s scrutiny, and it’s up to you to decide at what age and under what conditions children can have access to the trust.
  • If You Become Incapacitated. If you were to be hurt in an accident or suffer a stroke that left you in a vegetative state, household finances may be the last thing on your family’s mind. With a living trust, the trustee continues to act on your behalf when you’re unable to make financial decisions on your own which takes the burden off your loved ones. Having a trust in place can also help you to avoid adult conservatorship, which effectively means the court appoints someone to manage your financial affairs.

What a Living Trust Can’t Do

There are certain limitations on what a living trust can be used for. For example, you can’t use a living trust to leave instructions regarding your health care should you become incapacitated or terminally ill. You can, however, do so using a living will, also known as an advance health directive. If you’re worried about how both your medical care and your finances would be managed in the event of an illness or injury, your attorney can help you set up an advance health directive at the same time you create the living trust.

Also, a living trust doesn’t necessarily protect your assets against creditor claims – your creditors can still come after assets included in the trust since they can be transferred back to your control at any time.

you can set up a living trust with your lawyer

Final Word

Whether you need a living trust ultimately depends on your individual financial situation and your family’s needs. No one can predict the future, but planning ahead can give you some much-needed peace of mind. A living trust may not be right for everyone, but weighing the pros and cons can help you make an educated decision not only for yourself, but for your loved ones as well.

If you do set up a trust, remember to update it if you experience any significant life changes, such as the birth of a child or a divorce. You may also need to make adjustments if your financial situation changes because you acquire new assets or sell any property that’s in the trust.

Have you taken any steps to set up a living trust in case you become incapacitated?

Rebecca Lake
Rebecca Lake is a work-at-home mom of three living in coastal North Carolina. Her interest in personal finance began as a hobby but she’s since written hundreds of articles on everything from budgeting to bankruptcy. When she’s not writing about finance, she occasionally blogs about the ups and downs of the writing life on her site, AtHomeWriting.com.

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  • http://twitter.com/SirBrenton Brent Williams

    Thanks Rebecca. I think so many younger people who are focused on making wise financial decisions limit their efforts to debt reduction – I know I have. Your post serves as a good reminder to pursue a well-balances approach to financial health. Cheers!

    • http://www.ontargetcoach.com/ Brent Pittman

      Hey Brent. Great name! I agree, debt reduction and savings are great places to start, but mitigating risk and being smart with taxes has to be included.

    • Rebecca Lake

      Brent, you’re absolutely correct about using a well-balanced approach to
      manage your finances. When you’re focused on a single goal, such as
      paying down debt or saving for a home, it’s really easy to overlook the
      bigger financial picture. Thanks for the reminder!

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  • http://www.ontargetcoach.com/ Brent Pittman

    Thanks! for the reminder. This is something I want to do in the next 5 years (I already have a will) Any idea of a ball park cost to set one up?

  • Tejas Saraiya

    Many employers offer a low cost legal plan which works like “legal insurance” and often covers the creation of an estate plan.

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