What is a Living Trust?

What do I need and who is involved in creating or updating a Living Trust?

Similar to a Will, a living trust is just a document (some pieces of paper in a notebook) that say where a person wants their money and assets to go when they die.  That’s it, it’s that easy. But, unlike a Will, a living trust can prevent a person’s beneficiaries from having to go through a potentially time-consuming and costly court process (generally known as probate) to get their inheritance. 

Many lawyers use fancy terms and words to describe a living trust, which can make them seem complicated and intimidating to understand. However, it is actually very easy to understand, and even easier to have one. 

Creating a new living trust is simple and involves two main things, the participants of the trust and funding of the trust.

Four Participants of a Living Trust

A living trust only has four main participants. The Trustor, Trustee, Beneficiary, and Successor Trustee.

The Trustor

The first participant is known as the Trustor. The trustor is the creator and owner of the trust. If a married couple, both spouses own the trust together and are commonly referred to as the Co-Trustors. The trustor also gets to give their new trust a name, which is usually named after the owners themselves. For example, “The Smith Family Trust” for a married couple, or “The John Smith Trust” for a single person.

The Trustee

The second participant is known as the Trustee. The trustee is the person that controls and manages all the assets of the trust during their lifetime. The trustee can open bank accounts, make withdrawals, buy and sell real estate, and even make stock market investments. Basically, the trustee manages all the assets under the trust. Now, guess who gets to be the trustee? The trustor! That’s right. The trustor (as the owner of the trust) selects themselves to also be the trustee, and therefore both own and control all the assets of the trust just as before without a trust. If a married couple, both spouses manage the trust assets together and are commonly referred to as the Co-Trustees.

The Beneficiary

The third participant is known as the Beneficiary. The trustor gets to choose the beneficiary and can choose whoever they wish. Anybody can be a beneficiary. Many people choose their children as beneficiaries. Relatives such as siblings, aunts and uncles, nieces and nephews can be beneficiaries. Friends can be beneficiaries. A charity can be a beneficiary and even pets. The trustor can also control what percentage of the inheritance each beneficiary is to receive, and when the beneficiary is entitled to receive their inheritance (for example, nothing until reaching the age of 25, etc.).

The Successor Trustee

The fourth and final participant is known as the Successor Trustee. The successor trustee has a very limited role and limited duties.  The successor trustee does absolutely nothing until after the death of the trustor (or after the death of the 2nd spouse if a married couple). The successor trustee’s only job is to distribute the assets as instructed to the beneficiaries. That’s it, that’s all they do. Now, just like beneficiaries, the trustor gets to choose their successor trustee. And also just like beneficiaries, the trustor can choose anyone they want.  A trustor can feel comfortable in choosing a successor trustee as they are “not decision-makers”. They have to follow the trustor’s instructions as to who the beneficiaries are, how much they get, and when they get it.  Many people actually choose some or all of their beneficiaries to also be the successor trustees. As an example, let’s say two children are named as beneficiaries.  Those two children can also be named as the co-successor trustees.  When the time comes the two children can, in essence, transfer their inheritance to themselves. But, again, anyone can be chosen to serve as the successor trustee.

Funding a Living Trust

After naming all the participants, what’s next?  Well, when first setting up a living trust there is a little bit of work to do. It’s actually a process and that process is known as Funding a Trust. Funding a trust is really simple to understand.  It is just a change of ownership of the person’s assets.  A person simply removes themselves as owner and replaces the living trust as the owner. For example, John and Mary Smith would remove themselves as joint owners and replace the owner as “The Smith Family Trust”.  That’s it. That’s all funding is. Funding needs to be done with all the major assets owned by the person, and these days it’s really easy to do.  All the financial institutions have plenty of customers with living trusts. All a person needs to do is contact their institution and tell them a living trust has been created. They will know exactly what to do. They will create a new registration card and list the new trust’s name as the owner. It’s that simple.

At this point funding may seem very easy to understand, but why do living trusts need to be funded? The following answer will tie together exactly how a living trust works. Any assets owned by a person at the time of death generally have to go through court.

However, a living trust is not a person. It can never die.  This is how a living trust avoids the whole court process and this is why assets are owned by the trust instead of in an individual’s own name.  Since a trust never dies, the assets owned by the trust bypass the courts and are thus inherited immediately.

John & Mary Smith

Below is a short story about John and Mary Smith, a common example of a family looking to protect their family’s inheritance. 

John and Mary Smith have been married for a little over 25 years. They live in a comfortable home where they have lived since marriage. Unfortunately, a couple of their friends recently had their parents pass. They saw their friends struggle with paperwork, attorney appointments, and court appearances to get their inheritances even though the families both had Wills drawn up. One friend’s family became entangled in fighting over the inheritance adding a ton of stress to it all. The name of this court process is probate. John and Mary decided to see if there was a way to avoid all their friend’s problems in passing their inheritance to their loved ones.

They first looked into setting up a simple Will. After a bit of research, they found out that a Will would still have to go through the probate process because the assets they owned exceeded the maximum value to avoid probate in their state. Just the value of their home would trigger the whole process their friend’s families went through. Because of this, they looked into another solution known as a Living Trust.

Similar to a will, John and Mary found a living trust allows them to decide exactly how they want to leave their inheritance and who gets their assets. Even though John and Mary would retain complete control of all their major assets, the main difference is that the living trust becomes the legal owner of those assets, which is a really good thing. Because the trust is not a person and can’t die, there is no requirement for the assets legally owned by the trust to have to go through probate.

After watching our free educational webinar, John and Mary were confident a living trust was the best option for them. They decided to create a trust (“The Smith Family Trust”) and place their major assets under it. Their home, stocks, bonds and even the company they owned were all listed under the trust. We made it easy for them to create their trust. John and Mary simply completed our plan attorney’s one page homework assignment, which surprisingly only took them 15 minutes to complete. Here is an example of the form they filled out.

To create the trust, John and Mary listed their:

Beneficiaries, who gain control of the trust and trust assets after they pass. They decided to leave most of their assets like their home, stocks and valuables to their children but wanted to give their van to their local church as they always used the van to help with mission trips. 

Trustees, who control and manage the trust assets. They named themselves as the trustees. They thought of adding another family member as a trustee but decided it was best to keep it between themselves.

For their Successor Trustee, the person who gets the assets to the beneficiaries after death, they listed their neighbor and best friend since high school. At first, their neighbor was a bit nervous about holding such responsibility but then realized he just needed to follow the instructions the Smiths left for distributing the assets. 

Now that they have a living trust, if they buy a second home or car and want to include it in their trust, they will simply use The Smith Family Trust as the owner instead of their own names as they did before having a trust. This way if anything happens to them, all of these new assets are protected by their trust.

John and Mary can also change their trust all they want during their lifetimes. If their son doesn’t finish college they can cut him out! LOL.

In under 30 minutes, and in less than 3 weeks for their lawyer to complete the paperwork, for only $599 John and Mary have peace of mind knowing their assets are protected and will be properly distributed. The Smith family will not have to face what their friends’ families went through to get an inheritance.

How Much is a Living Trust?

The cost of a living trust can sometimes vary from service to service. We’ve put together a Living Trust cost & service comparison to show the differences.  Click here to learn how to obtain a Living Trust for $599.