Establishing and Funding a Single or Joint Revocable Living Trust

A revocable living trust sets out how your property will be managed and distributed during your lifetime or after your death. You transfer legal ownership of various property interests (as opposed to beneficial interests) into the trust and a trustee manages it, while a beneficiary reaps the benefits of those assets. Generally, the beneficiary will receive income from the property. In a revocable living trust, the beneficiary can be the person who sets up the trust (sometimes referred to as the "grantor"), children, friends, or charities.

Single and Joint Revocable Living Trusts

Trusts can be both single and joint. A single living trust involves just one individual, while a joint living trust usually involves a married couple. Joint living trusts are commonly used to transfer assets between spouses upon one spouse’s death. However, like a single living trust, other beneficiaries can be designated as well.

In a joint trust, there is only one document that includes instructions for both trusts. Combining the two trusts has certain administrative advantages at the outset because there is no need to create two separate documents.

Joint trusts are particularly useful in community property states, such as Arizona, California, Nevada, Idaho, New Mexico, Louisiana, Texas, Washington, and Wisconsin. Any property in a joint trust will remain community property in these states, and it has certain tax advantages as well. The same tax benefits will likely not be available in non-community property states, however.

What Does "Revocable" Mean?

A revocable living trust can be cancelled or amended at any time. This freedom to move assets is appealing for many individuals. It gives them some leeway to deal with emergency situations if necessary. Revocable living trusts become irrevocable upon your death because only you can change or cancel the trust.

An irrevocable living trust cannot be modified after it is developed. There are certain extenuating circumstances where the trust could be canceled, but these are rare. Many people dislike the idea of not being able to move their assets outside of the trust if necessary. However, irrevocable living trusts are sometimes appealing for those who are concerned about both asset protection and avoiding probate.

Living Trusts and Testamentary Trusts

A living trust will change after your death to an irrevocable trust. This is not the same as a testamentary trust, which only comes into existence upon your death. A living trust is effective both during and after your lifetime if properly prepared. Individuals can also develop testamentary trusts as part of their will, regardless of whether they have a living trust established first. Testamentary trusts will be probated as part of the will as well.

The trust instrument, or the document that explains how property should be treated within the trust, will specifically state how your assets should be distributed upon your death. The trustee will then carry out your wishes. A living trust is often used as a means to avoid probating a will after death. Having a trust usually makes property distribution more cost-efficient and faster. In fact, using a living trust can cut down on expenses by up to 15–20%. A trust often offers a higher level of privacy than a will as well.

Some individuals attempt to use a trust in place of a will; however, this is generally not a good idea as a will has more flexibility than a trust. In addition, there will be property or assets that you cannot put into a trust. Your will should indicate how to handle this remaining property. A will also describes your wishes relating to issues such as burial, naming executors, and naming guardians. A will is often considered a minimum requirement for estate planning.

Can I Create a Trust on My Own?

Many people assume that they need an attorney to set up a trust, but this is generally not the case. While some more complicated trusts may require the skills and knowledge of an experienced lawyer, a revocable living trust is usually simple enough that you can develop it on your own. This is particularly true if the only purpose of the trust is to avoid probate after your death.

Nonetheless, having a form to go off of to develop this type of estate planning instrument can be extremely helpful. Using a form helps you consider a variety of scenarios to create an effective trust, and it will include the legally binding information that you need to create a trust on your own.

Information Necessary to Create a Living Trust

Before you begin the process of establishing your own living trust, you should gather some information first. You can start this process by answering the following questions.

  • Who do you trust to manage your property after you pass away?
  • Do you want to manage the trust while you are alive or would you rather someone else do it?
  • Have you spoken with the trustee you have in mind to see if they are willing to manage your property for you?
  • If your chosen trustee becomes incapacitated, who would be a good person to take over?
  • Who do you want to be the beneficiaries of the trust?
  • How will the assets be divided among your beneficiaries?
  • What would you like to do with your property if those beneficiaries are not available?
  • Who would be the person to manage the property on behalf of young children?

In many living trusts, you are the trustee while you are alive. However, you will need to designate a trustee to replace you after you pass away. The trust instructions will include information on how to give responsibility to the successor trustee, and it will provide the trustee with specific instructions on how to distribute your assets. These instructions often differ from the rules in effect while you are alive.

Funding a Living Trust

Your trust must be funded to work as intended. If you do not fund the trust, then there really is no point in setting it up. Your trust (and your trustee) can only control or affect the assets that it owns, which means that if you do not get around to funding your trust, the property outside of the trust will still need to go through the regular probate process.

Funding the trust is fairly straightforward and you can complete this process on your own. However, you may need some additional help if you must transfer assets such as real estate or securities. A realtor or broker can be a valuable resource. Preparing a general warranty deed yourself is also an option to transfer property to your trust.

Funding the living trust involves the process of moving your assets into the name of the trust. Physically changing titles to things such has bank accounts and vehicles will be an important part of this process. You can also make changes to things like your life insurance or other beneficiary designations so that the trust is the beneficiary of the policy.

Extra Steps

Keep in mind that simply listing the property on the trust document is not enough to transfer some property. If you have a deed or a title slip, you need to take extra steps to transfer the assets into the trust.

Is It Difficult to Fund a Living Trust?

Trusts are widely used, so you will have little to no trouble transferring your assets from your personal ownership to trust ownership. Nonetheless, the process does take some time, so it is important to start early to avoid any hiccups along the way.

Some entities may require a short assignment document to show that it is really your desire to transfer your assets to the trust. In other situations, you can simply move the assets by phone, mail, or email. Some institutions will also need to see the trust documents to prove that the trust exists. Showing them a copy of the trust documents or a Certificate of Trust is generally sufficient to meet this obligation. A Certificate of Trust provides general information about the trust without sharing the details for increased privacy.

It is easy to put off funding your trust because it is tedious and time consuming, but delaying for too long can have serious consequences. Make a list of your assets, along with their locations and values. Order them in terms of value, whether that is emotional, personal, or monetary value. Start with the most valuable on the list and work your way down.

Which Assets can I Put in My Trust?

Ideally, you will put everything you own in your revocable living trust. However, depending on your unique financial and personal situation, that may not be desirable or practical. There are also some assets that you cannot put in a trust. Generally, your trust should contain the following assets:

  • Bank accounts
  • Savings instruments (CDs, bonds, etc.)
  • Real estate
  • Business interests
  • Notes payable to you
  • Investments

Retirement accounts, such as pensions, IRAs, or 401(k)s, cannot be held in a trust. There are legal restrictions that prevent retirement accounts from being moved into a trust. You can, however, name someone else as the beneficiary of the retirement account. Naming someone else allows you to avoid probate as to that particular asset. You can sometimes name the trust as the recipient as well.

Real Estate and Trusts

Real estate is perhaps the most important asset included in most trusts. The process of drafting a new deed and filing it with the appropriate government office is relatively straightforward. However, many individuals have concerns about mortgages and other issues when transferring real estate into a trust.

As you are using a revocable living trust, your mortgage lender should not have any objections to your trust taking over the mortgage instead of you personally. This is generally true even if your mortgage has a “due on sale or transfer” clause. Regardless, you should still talk to your lender about transferring the property before you do it on your own. Some lenders have special rules and regulations that you must follow, even if you are just transferring the property to your trust.

Joint Property and Trusts

Keep in mind that if you transfer joint property to a single living trust, the joint tenancy portion of the asset is destroyed. Consider an example: imagine that a couple owns their house in joint tenancy. They want to transfer the home into the wife’s trust. Upon the transfer, the husband’s interest in the home is lost, and the trust owns the entire home. This could pose a problem for some couples if they separate down the road.

Transferring the home to a joint trust may correct these issues; however, if you own the property in joint tenancy, the home will automatically transfer to the other owner upon your death. That means that if your goal is to avoid probate, there is no need to transfer the joint property into a trust at all.

If you transfer separate property into a trust, it automatically becomes part of the joint trust so that the trust itself owns it, not one person or the other. Again, this could be an unintended consequence for some couples, so it is something to consider before transferring property.

Creating a Trust

A revocable living trust is a straightforward estate planning tool that can be very valuable for individuals and families. Most people who have average assets and who have a well thought-out beneficiary plan can create their own revocable living trust, whether it is single or joint. Having forms that comply with regulations and laws in your state can be a huge help in getting this process started. Use the estate planning tools at LegalNature to get the ball rolling.