How To Set Up A Living Trust 2024 Guide

A living trust, or inter vivos trust, is a legal arrangement that is created while you are alive. You’ll transfer ownership of assets to the trust, which becomes the new legal owner of your property. A trustee will manage the assets that you have transferred and a beneficiary that you name will benefit from them.

Living trusts are created by individuals who are typically called grantors, settlors, or trustors. The grantor who creates it will designate who the beneficiaries should be and who should act as the trustee, as well as decide what assets to transfer into the ownership of the trust. The assets held within the trust can be transferred outside of the probate process upon the death of the trustor.

Revocable living trusts, or RLTs, can be changed or modified during the course of the grantor’s life. Since the grantor largely retains control over the assets, an RLT provides very limited asset protection compared to irrevocable trusts. Assets within it also can be subject to estate tax, even though they transfer outside of probate.

RLTs are very different from irrevocable trusts, which are much more difficult to modify and which provide more protection for assets as well as the ability to avoid estate tax in certain circumstances.

If you want to set up this type of arrangement, here are the steps that you will need to take.

1. Choose What Property Should be Transferred

The purpose of this type of legal arrangement is to transfer ownership of assets so the first key step is to identify what money and property should be included.

It’s important to understand that if you transfer ownership of a home with a mortgage, this could sometimes trigger a due-on-sale clause and necessitate paying the entire loan. However, this may not be the case when an inter vivos trust is used and the grantor remains in the home and serves as the trustee.

Generally, any property that you’d hope to transfer outside of probate should be included unless there’s a specific reason not to, such as the possibility of a lender requiring full payment.

2. Identify a Trustee and Successor Trustee

In most cases, the grantor will be the primary trustee for an RLT unless the grantor becomes incapacitated or passes away.

If you are the grantor and name yourself the trustee, you will continue to maintain control over all assets even after ownership is transferred. This is one reason why RLTs are so popular—they provide a solution to avoid probate without giving up too much control over money and property.

It will be important to name a successor trustee. This is someone who will take over managing assets in the event that the grantor no longer can due to death or incapacity. Think carefully about who this will be as this individual is someone who will be managing your money and property if you become unable to do so on your own. The trustee will also facilitate the transfer of your wealth after your death to your chosen beneficiaries.

Trustees can spend or invest money held within the trust, but must always do so with the appropriate objectives in mind. Specifically, the trustee has a fiduciary duty to appropriately manage assets on behalf of the beneficiaries. This is the highest duty under the law.

A fiduciary must act in the best interests of the beneficiaries in managing assets. They cannot put their own interest first in any circumstance. Still, it’s important to make sure you are confident the individual you select as your trustee will act appropriately and has the necessary knowledge to manage your property wisely.

3. Select the Beneficiaries

Beneficiaries are the people who will benefit from the arrangement you are creating. Often, you will be the sole beneficiary during your lifetime when you create an RLT. However, you can name co-beneficiaries who will also get some money or property during their lifetime. For example, your spouse or child could be a co-beneficiary.

You will also need to name residuary beneficiaries. These are the individuals who will inherit and benefit from the trust assets after you have passed on. Trustees manage the assets on behalf of the beneficiaries and facilitate the distribution of assets to them in accordance with the instructions that are set forth when the arrangement is created.

Trust creators often name close family members as beneficiaries, but it’s also possible to name a charity or other organization to benefit from the assets held in trust.

4. Create the Necessary Documents

After identifying the key details about property to transfer, and choosing a trustee and a beneficiary, it’s time to actually create the appropriate legal documents to create a trust arrangement.

The specifics of the documents can vary depending on the type of trust and your location. It’s easy to find templates online to create this kind of arrangement but it’s not always a good idea to use them. The process can be complex and require that important, well-informed decisions be made regarding your assets. Undoing mistakes can sometimes be impossible—especially if they aren’t discovered until after your death when it comes time to transfer assets to beneficiaries.

Getting legal help can be important to ensure that all of the paperwork is done properly, that the right type of trust is selected and that the right assets are transferred—especially when there are complexities such as property with mortgages on it or assets owned in different states.

5. Transfer Assets

Creating your trust is just the first step. After that, you must actually move assets into the trust. You’ll have to formally transfer ownership and make the trust the new legal owner in order to reap the benefits of this arrangement.

An attorney can assist you with the process of deciding what assets to transfer and of changing the title or other ownership records to ensure that everything is done correctly and that you and your beneficiaries will reap the full advantages of using this powerful estate planning tool.