Person pointing to paper where other person should sign on the bottom of document.

A Complete Guide To Living Trusts And How They Work

Hanna Kielar7-minute read

November 30, 2022

Share:

A living trust may seem like a complex legal instrument designed primarily to help well-off individuals preserve family wealth. However, they can also be a helpful tool for real estate planning for everyday families of every size and background.  A living trust can be utilized to avoid probate and ensure that beneficiaries receive certain assets.

Read on to learn more about living trusts and how they work with regard to real estate and property holdings.

What Is A Living Trust?

A living trust (also known as a revocable trust) is a legal arrangement that allows the owner of a property to transfer ownership to a trust (a legal entity which can contain real estate and other holdings) – and then transfer ownership of this trust to another party while also retaining control of it during their lifetime.

Cemented with a written legal document that is signed by the individual establishing the trust and witnessed by a notary public, setting up a living trust establishes the legal entity into which a donor (also called a grantor) can transfer assets.

For example: Under the terms of a living trust, a parent can take a house that they own, transfer ownership of it to the trust, and then subsequently transfer it to a child when a parent dies or becomes disabled.

In addition to listing the property in question, the living trust document also names a trustee (the individual who will administer assets contained within the trust). It will also specify one or more beneficiaries (the people who will receive the benefits of the trust when the grantor dies).

While effectively allowing a trust maker to retain control of the trust during their lifetime, the living trust also allows ownership of the trust to pass to the ultimate recipient. In other words, the beneficiary (the child or children in the previous example) will receive any assets upon the grantor’s death.

What Does A Living Trust Do?

There are several reasons to explore setting up and maintaining a living trust for the benefit of those dear to you. Among them are as follows.

Avoid Probate

The most common reason to establish a living trust is to avoid probate, which is the court-supervised process of winding up a deceased individual’s affairs and estate. While probate can tie up loose ends, it’s no secret that it can also be a lengthy, time-consuming and highly costly process for those involved. Most grantors turn to a living trust as a means to avoid it and spare their heirs the hassle by avoiding the courts entirely. Living trusts avoid probate by transferring property to beneficiaries without going through the probate process.

Maintain Privacy

Court records are public, and it’s not uncommon for the process of probate to uncover debts, unpaid balances, sums due to specific individuals and other details that individuals may wish to keep private. When an estate goes through probate, anyone can look up the records and access information that the grantor and beneficiaries might prefer to keep private. A living (aka revocable) trust makes it simpler to maintain your privacy by bypassing probate entirely.

Provides Flexibility

It’s not uncommon during an individual’s lifetime for financial or personal situations to change. It’s also relatively common for grantors to want to make changes to the terms of the trust and retake control over donated assets – a process which can be readily facilitated under a living trust. Having a living trust makes it simple for you to change the assets or even the beneficiaries of the trust whenever you desire.

Provides For Minors Or Dependents With Issues Of Concern

Grantors also enjoy the option of tailoring the terms of a revocable trust to make sure that loved ones are provided for. For instance, many grantors may have concerns about adult children who are not adept at managing money or who may suffer from addiction or chronic illness. A grantor who wants to place conditions on the use or sale of assets contained within the trust can do so as needed. Additionally, a grantor with minor children or a dependent with a disability must also create a will to appoint a guardian (someone who will look out for these dependents) for their minor children.

Provides For Management Of Assets In Case Of Grantor’s Disability

Having a trustee in place to handle assets also provides the grantor with a layer of protection should they become disabled and unable to handle their own affairs (and the affairs of the trust). If you’re currently well and able but concerned about the future effects of age or declining health, you can also name yourself a trustee, while also specifying the name of a co-trustee or successor trustee. Doing so allows you to serve as the trustee for the living trust for as long as you are able and then pass over management of the trust to the successor trustee if your situation changes.

Take the first step toward the right mortgage.

Apply online for expert recommendations with real interest rates and payments.

What Does A Living Trust Not Do?

Of course, as with all legal decisions, there are upsides and downsides to consider. There are also limitations to what a living trust can accomplish. To decide on the best course of action and if establishing a revocable trust is right for you, you may want to consult with an attorney who specializes in estate planning.

Let’s take a look at what a living trust can’t do for you and why it matters.

Protect Assets From Nursing Home Costs

A revocable trust does not protect assets from being applied to offset nursing home costs when a grantor is applying for Medicaid reimbursement. You’ll want to consider these potential costs as you age and your living conditions shift. Be sure to account for possible nursing home costs when doing estate planning and developing a financial strategy.

Avoid Estate Taxes

Hoping to save a little money on estate taxes? Unfortunately, it’s a no-go according to the Internal Revenue Service (IRS). So long as a grantor retains control of their assets, these assets will be considered part of their estate upon the grantor’s death.

Help You Save On Legal Costs In The Short Term

You will need to hire an estate attorney to put together the paperwork that’s necessary to help you set up a living trust and then transfer assets into it. Although a worthwhile investment from a long-term perspective, doing so will present you with added expense upfront. Going through probate could cost potential heirs a lot of money in the long run.

Get You Off The Hook On Making Hard Decisions

Setting up a living trust will still mean making a lot of hard decisions. You’ll have to decide which beneficiaries will receive which real estate properties and other assets – seldom an enjoyable or comfortable topic. Likewise, you’ll also have to spend time putting together paperwork and documenting assets in detail.

How Does A Living Trust Work?

As above, a living or revocable trust effectively creates a legal entity. You can think of it as a virtual holding company of sorts, you can transfer the ownership of assets before later passing ownership to another party. Control and usage of these assets can also be set to follow specified terms and conditions. However, before establishing one, you’ll want to meet with an attorney to discuss if it’s the best strategy to help you meet your goals.

If you decide to create a living trust, your lawyer will help you create the trust, and then transfer assets (for example, homes, condos, apartments and other real estate investments) from your name to the trust’s ownership. When real estate is involved, you’ll need to transfer the title of the property to the trust.

How Much Does It Cost To Set Up A Revocable Trust?

Costs to set up a revocable or living trust can vary widely depending on the attorney you choose and the region where you are located. In general, it costs more to set up a trust than it does to create a will. However, with a will, an estate’s holdings still need to go through probate. If your estate needs to go through probate, it will incur court costs and fees that can add up quickly, such as title transfer and expenses due to record-keeping.

What’s The Difference Between A Living Trust And A Will?

A will expresses the wishes of a deceased party with regard to the disposition of their property, versus a trust which executes the grantor’s wishes upon their death. Wills can also be contested and any hearings that are held will be public. As mentioned above, wills are a necessary addition for those wishing to establish guardianship for dependents. As a general rule of thumb, wills are a vital part of an overall estate plan as there are always items of value, usually cash, that must still be distributed after a grantor’s passing.

FAQs

What is a living trust?

A living trust, or revocable trust, is a legal arrangement that you can use to transfer assets both during your lifetime and to your heirs. Many people choose to set up a trust because of its flexibility, since it can be easily changed as necessary if circumstances change during your life.

How can I avoid the hassle of probate?

Whenever a loved one passes without a will in place, their estate will be considered intestate and will need to be decided in probate court. One of the many benefits of careful estate planning is it can help avoid the cost and inconvenience of probate. If you’re looking to avoid probate, establishing a living trust may be your best option.

What is the difference between a will versus a living trust?

Though a will and a living trust have similar functions, they also have some differences as well as advantages and disadvantages. Wills provide insight into your final wishes and go into effect when you pass away. Living trusts become active as soon as they’re made. If you’re trying to decide if you only need a will or if you will also want to set up a living trust, you can discuss it with an estate planning attorney.

The Bottom Line: Living Trusts Are An Important Tool For Ensuring That Your Wishes Are Carried Out

Living trusts are a helpful tool for estate planning as they help avoid the cost and hassle of probate and ensure that assets are more rapidly and reliably dispensed to the beneficiaries. Revocable trusts also offer considerable levels of control over assets, and considerable flexibility with regard to changing terms, trustees, beneficiaries, and holdings as needed.

If you’re looking to leave a legacy for your loved ones, having your estate and real estate affairs in order is key. Making improvements to your home can increase the value of the assets you leave to your loved ones. Looking for a way to pay for those home improvements? Reach out to discuss a cash-out refinance and start the refinancing process. You can give us a call at (833) 326-6018.

Take the first step toward the right mortgage.

Apply online for expert recommendations with real interest rates and payments.

Hanna Kielar Headshot

Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto, RocketHQ, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.