Making a Living Trust [Important Steps You Need To Take]

September 11, 2018
Written by: Steven Gibbs | Last Updated on: April 4, 2023
Fact Checked by Jason Herring and Barry Brooksby (licensed insurance experts)

Insurance and Estates, a strategic life insurance provider composed of life insurance professionals, is committed to integrity in our editorial standards and transparency in how we receive compensation from our insurance partners.

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How To Create a Living Trust

A revocable living trust allows you to set up a plan that protects your estate both in life and in death. In life, the living trust allows your trustee to take charge of your estate if you are diagnosed as incapacitated. In death, your living trust allows your chosen trustee to administer your estate according to the terms of the trust you set forth in advance. Understanding how to set up a living trust as part of your estate plan is an important step, even if you hire an attorney, and this insight is the focus of this article.

What Is a Living Trust? 

A living trust is an estate and asset planning device that is often used to protect assets from creditors and to assist in avoiding having an estate pass through the probate process and incur estate taxes when a person dies.

The name “living trust” is used to denote that the trust is set up while the grantor, or the person whose assets or property will be transferred to the trust, is alive when trust is established and this transfer of the grantor’s assets and property takes place when the grantor is still alive.

The living trust is also known as a “revocable living trust”, which means that unlike an irrevocable trust, the revocable trust can be revoked during the grantor’s lifetime.

A living trust appoints a person, known as the trustee, to manage the assets and property in the living trust, both during the grantor’s lifetime as well once the grantor has died.

Primarily, the trust sets forth the terms pursuant to which the the trust is to be governed and pursuant to which the assets eventually will be transferred or disbursed.

Once a living trust has been created and the property transferred to the trust, the assets and property in the trust does not even belong to the person who created the trust in the first place.  Instead, those assets and that property officially belongs to the trust once the transfer has been consummated.

Although the person who owned the assets prior to the creation of the trust typically will appoint him or herself as the trustee during his or her lifetime, this is not necessarily always the case.

Sometimes, such as if a person is just diagnosed with Alzheimer’s or dementia, he or she may create a trust and appoint someone else as the trustee because the grantor will at some point be unable to manage his or her assets and/or property.

A living trust is also a legal entity whose existence is separate from the grantor who set up the trust; therefore, the living trust will survive the grantor and will continue to exist even after the grantor has passed away. 

Setting Up a Living Trust: What Does it Entail?

The governing document for a living trust is the actual trust document itself.  The revocable living trust sets forth the terms of the trust, defines what assets or property are included in the trust and who the ultimate beneficiaries of the trust are, appoints a trustee who will oversee the operations of the trust and the disbursal and transfer of those assets, and sets forth the ground rules pursuant to which the trust will be governed.

Setting up a living trust requires two main actions: (1) preparation of the governing trust document(s) themselves and then (2) properly funding the trust to ensure that the property that is to be transferred to the trust is appropriately re-titled.

Typically, an attorney will prepare the documents necessary to establish a living trust and take care of the process of re-titliing the assets in the trust’s name.

However, there is no requirement that a trust document be prepared by an attorney in order to be legally enforceable.

Nevertheless, the process actually can be complicated, particularly if a substantial number of assets or property are involved, and the downside of DIY estate planning is that your estate plan falls apart.

Using a estate planning attorney with experience in setting up a revocable living trust is particularly important the more numerous the assets or illiquid or difficult to transfer ownership of the property.  This includes re-titling all assets and property that are to be transferred to the trust in the trust’s name.

What You Need Before Setting Up Your Living Trust

You should have certain information at your fingertips when creating your living trust.

First, you should make a list of all your assets. The assets in your living trust may include your stock and mutual fund accounts, your primary residence and investment properties. However, certain assets, such as life insurance, should pass through the beneficiary designation, and not through your living trust.

Second, you should consider who your trustee will be. It is good to name a trustee and a successor trustee. That way, if your original pick cannot or will not serve as your trustee, the successor trustee can step into the role.

Third, determine who your beneficiaries will be and under what circumstances they will receive their inheritance under the terms of the trust. You might want to give all your children equal shares or give more to one child with special needs. Similarly, you may decide you want to give a portion at specific ages, such as 25% at age 25, 25% at age 30 and the remainder at 35,

How Much Does a Living Trust Cost?

The average cost for establishing a living trust using an attorney can range from anywhere from $400 on some DIY estate planning websites, to $5,000 or more depending on the size of the estate and complexities involved.

Who Would Benefit from Setting Up a Living Trust?

A living trust can be useful for a number of purposes and mostly benefits those who have large estates they wish to pass onto their heirs upon their death.

During a person’s life, it can be valuable because, under most state laws, the assets or property in a living trust are not subject to the claims of creditors if someone files for bankruptcy or defaults on a loan.

Therefore, setting up a living trust can be useful for preserving assets or property for the ultimate benefit of beneficiaries while allowing the grantor to take some risk by, for example, starting a business that will require him or her to take out sizeable loans, which often require the grantor to pledge some personal assets as collateral for the loan.

A living trust also is perhaps most useful when the grantor dies.

First, it is a very effective estate-planning tool for those whose estate may be large enough to trigger federal estate  tax.  It is particularly valuable for those who many have high value estates that would normally trigger estate taxes because assets that are in a living trust are not a part of a decedent’s estate that pass through probate.

The current threshold estate tax exemption for 2018 is $11,180,000, and $22,360,000 for a married couple.(1)  This means an individual can leave up to $11.18 million to his or her heirs without incurring any taxes, while a married couple can leave assets and property of up to $11.18 million in value to their heirs without incurring any federal estate or gift taxes.

If the individual has assets in excess of these amounts when he or she dies, then he or she would pay taxes on the amount of the value of his or her estate in excess of these exemptions.

For example, if an individual died with an estate with a value of $15,000,000, the 40% tax rate would only apply to the $3,820,000 of the estate’s value above the $11.18 million exempt amount.  This would result in an amount owed in estate taxes of 40% of that $3.82 million, or $1,528,000.

Will vs Trust

There are many advantages of setting up a living trust vs a will for estate planning purposes.

Utilizing a living trust instead of passing assets to heir upon a grantor’s death is also an easier, less expensive, and less cumbersome way than transferring those same assets by means of a will.

Because ownership of the assets in the trust was given to the trust prior to the decedent’s death, those assets and property are not the decedent’s any longer.  Therefore, when the decedent dies, whatever assets and/or property are in the name of that person’s living trust would not be a part of the decedent’s estate given those assets no longer legally belong to the decedent.

This has the benefit of reducing the value of the decedent’s estate, which makes it less likely the estate will pay estate tax.

In addition, there is also the added benefit that assets and property do not pass through the probate process, meaning a grantor’s heirs will not need to hire an attorney and go through the often expensive and time-consuming process of probate, in which all transfers are supervised by a judge and typically must be approved by the court before they can be effectuated.

A living trust bypasses the probate process entirely, allowing a beneficiary to receive the property or asset directly from the trust itself (pursuant to whatever terms the trust laid down on that transfer, of course).  This enables the beneficiary of trust to receive the asset in a less cumbersome way without incurring the expense, red tape and delay associated with the probate process.

Finally, a living trust can also be valuable for the grantor retaining some control over the use and disposition of a decedent’s assets and property after he or she dies.  A living trust can set certain conditions upon the transfer or gifting of certain assets, whereas this is much more difficult to do with a will.

For example, if a grandparent sets up his or her living trust to pay for college expenses for the grantor’s grandchildren, the trust could direct the trustee to only pay the tuition if a grandchild is maintaining a certain minimum grade point average.

Simply leaving the assets to the grandchildren in a will means those grandchildren will receive that money and can do anything they want with the money, including using it to pay their tuition (or do something else with the money) if it is simply gifted outright to the grandchildren through a will.

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