How to Set Up a Living Trust

A living trust, also called a revocable living trust or simply a revocable trust, is a common estate planning tool. When you create a living trust and transfer assets into it, those assets avoid probate court when you die. A living trust can also make it easier for your loved ones to manage your estate in the event you become incapacitated during your lifetime, and after your death.

Why Create a Living Trust?

The primary reason for creating a living trust is to avoid probate. Your state's laws govern when an estate must go through probate, and the process itself differs from state to state. However, in general, probate can be a time-consuming and costly process. Probate proceedings are also public.

Because assets inside a properly structured and properly funded living trust avoid probate, you are making it easier for your heirs and beneficiaries to administer your estate, and you are passing more of your money to your intended beneficiaries, out of the public eye.

In addition to probate avoidance and ease of administration, people create living trusts for other reasons, including the following:

• Charitable gifting
• Estate tax planning
• Designating the person or company who will administer the trust estate
• Providing control for minor beneficiaries or financially irresponsible beneficiaries
• Planning for blended families
• Providing for beneficiaries with special needs

Understanding Common Terms

Legal lingo can be complex and confusing; understanding some key terminology can help you make sense of, and make wise decisions related to, your new living trust.

The “Grantor” is the person creating and funding a living trust. The grantor may also be referred to as the “Settlor” or “Trustor.” These terms are interchangeable.

The “Trustee” is the person or institution who has control over trust assets. The trustee is bound by law to honor the terms of the trust agreement, managing and distributing trust assets as provided in that legal document.

The trust’s “Beneficiaries,” whether one or more, are the persons or charitable organizations that receive some benefit from the trust.

Choosing a Trustee

One of the most important decisions you must make as a grantor is who to name as a trustee. The trustee has control over your trust assets if you become incapacitated and after your death.

Grantors generally serve as the initial trustees of their own trusts. When you initially create your living trust agreement, you essentially enter into an agreement with yourself, as both the grantor and the initial trustee. However, it is important to name a trusted family member, friend, or professional fiduciary who can take over and carry out your wishes when you are not able to serve as a trustee. This person is your “successor trustee.”

The successor trustee can be any competent person over the age of 18, or it can be a professional, such as the trust department of a bank. Although administering a trust avoids the hassle that can come with probate proceedings, it still comes with a lot of responsibility. The trustee must:

• safeguard and keep an inventory of trust assets;
• pay final expenses and valid debts;
• prepare and file income and estate tax returns (if applicable) and pay taxes from trust assets;
• distribute assets according to the trust agreement; and
• keep track of assets coming into and flowing out of the trust, and account to beneficiaries.

These tasks can be time-consuming and require attention to detail. When you are considering who to name as your successor trustee, to serve if you cannot serve, consider whether the person you want to name has the capacity to manage things for you. Being a trustee is a big responsibility, so be sure you completely trust the person you want to name.

You can name more than one person to act as co-trustees. If you do so, you will have to decide whether your trustees can act independently or jointly when making decisions and distributions.

There are professional fiduciaries who can serve as a trustee of your living trust in exchange for a fee, typically expressed as a percentage of the assets inside the trust. Many banks have trust departments that can serve as a trustee for your trust.

Finally, understand that you cannot obligate anyone to serve as your successor trustee. Appoint someone you believe will be willing and able to serve. You can also name one or more levels of successor trustees, so you have an alternate trustee waiting in the wings who is ready to step in if the first-named successor trustee is not able to take on that responsibility when called to serve.

Beneficiary Considerations

Sometimes, it is easy to make decisions about who should benefit from your living trust when you die. If you want to leave all of your assets in equal shares for your adult children, outright and free of trust, then that is relatively straightforward.

Your living trust can also include more complex distribution strategies for beneficiaries. For example, if you have one or more minor beneficiaries or have an adult beneficiary who has not demonstrated financial responsibility in the past with his or her own money, then you could structure such beneficiaries’ distributions in a way that better helps protect the inheritance.

You might provide for distributions of a certain dollar amount or a specific percentage of trust assets each year or in five-year increments, so the beneficiary does not receive one large lump-sum distribution. You could also give your successor trustee authority and discretion to make distributions of trust income or principal for the beneficiary’s health, education, support, and maintenance. This type of provision can help ensure that assets will be there for your beneficiaries’ needs and care.

If you have a beneficiary who has special needs and is receiving government assistance, your trust can be structured to make funds available for the beneficiary’s needs without jeopardizing his or her eligibility for Social Security and other benefits.

A living trust can also be an effective way to leave assets to a combination of people and/or charitable organizations, with different beneficiaries receiving different percentages of trust assets. This can help you meet your philanthropic goals while still providing for your loved ones’ futures.

Finally, consider how assets should be distributed if one or more of your beneficiaries does not survive you. You can include succession strategies tailored to your wishes. For example, your trust might provide that if a beneficiary does not survive you, then that deceased beneficiary’s share passes to his or her descendants. Alternatively, the trust could say that a deceased beneficiary’s share simply passes to the other named beneficiaries who survive you.

Trust “Funding”

Creating the trust agreement is only the first step in setting up your new living trust. In order for your trust to function the way you want it to, you need to put assets inside the trust. This is called “funding” the trust.

When you fund your new living trust, you ensure the assets you place into the trust will avoid probate court and will be administered and distributed according to the terms of the trust agreement. There are several ways you could fund the trust:

• Lifetime transfers – You could transfer assets into the trust outright, during your lifetime. You could transfer title to real estate, bank accounts, investments, automobiles and other vehicles, and more. When you place these assets into your living trust, you retain control over them as the initial trustee of your trust. However, instead of owning them in your individual name, you will own them as trustee of your trust.
• POD or TOD designations – You could also name your trust as the “pay on death” (POD) or “transfer on death” (TOD) beneficiary of bank accounts and investment accounts. In some states, you can also create TOD designations for real estate by filing a Transfer on Death Deed or Beneficiary Deed with the county recorder or registrar of titles. Using POD and TOD designations allows you to leave those assets in your name during your lifetime, but allows the assets to pass outside of probate and according to the terms of your trust when you die.
• Beneficiary designations – If you own life insurance or retirement accounts, such as IRAs, Roth IRAs, 401(k)s, 403(b)s, or annuities, you can change the beneficiary designations for such assets to name your new living trust rather than naming individual people or charitable beneficiaries.

State-Specific Considerations and Provisions

Trust law is state specific. One of the provisions in your trust agreement should address which state’s laws will govern the interpretation of your trust agreement. A trust created in one state should be valid in any other state, but if you move to another state after creating your living trust, you may want to have it reviewed by a trust attorney in the new state. That is because there could be state-specific considerations that, if changed or added to your trust, could help benefit your successor trustee and beneficiaries.

For example, if your current state does not have an estate tax and if your estate is under the federal estate tax exemption amount, you may not have any provisions in your living trust agreement addressing estate taxes. If you move to a new state with a low estate tax exemption amount, you could amend your trust to include provisions designed to make the most of your exemption, potentially allowing you to pass on more of your wealth to your intended beneficiaries rather than to the taxing authority in your new state.

Executing Your New Living Trust

It is important to ensure that you meet your state’s requirements to make your new living trust valid. In most states, your signature needs to be witnessed by at least two disinterested adults, who can watch you signing and sign themselves as witnesses. Your state may also require your signature to be notarized.

Understand the formalities your state requires and plan to meet those requirements so there is no question later about whether the trust agreement is valid.

Reviewing and Amending a Living Trust

Your trust agreement should reflect your wishes at the time you sign and execute it. However, things change over time and you may find yourself wanting to make changes to your living trust in the future. One of the best features of living trusts is that they can be amended or revoked during your lifetime, as long as you have the mental capacity to do so.

You can change or revoke a word, sentence, paragraph, article, or the entire trust agreement if you wish. This means that if your wishes change later about who should inherit under the trust agreement or about who should serve as your successor trustee, you can update the trust agreement to reflect your changed wishes.

Amendments generally need the same legal formalities as the original trust agreement, including the signatures of any witnesses and/or the notary.

A Gift for Your Loved Ones

Using a living trust as part of your estate planning strategy can be a smart move—one that can ensure your wishes are honored after your death and that makes the estate administration process faster, smoother, and less expensive than going through probate court.

Now that you know how to setup a living trust you can easily create your own living trust online by using our living trust form or joint living trust form. 

Creating a living trust today is a gift for your loved ones after your death.