What is a living trust?

A living trust is one of those phrases people hear at a dinner party and nod along to. Someone's sister "put the house in a trust," and it sounded sensible, maybe a little grand. If you own a home and some savings, you may be wondering what a living trust actually is and how it works.

Here is the plain version: what it is, how it gets set up, what happens to it over the years, and what it can't do. For how a living trust fits with your will and powers of attorney, see our guide to estate planning documents.

What is a living trust, in plain words?

A living trust is a written set of instructions for your property, created while you're alive (hence "living"). You move property into it: the house, a brokerage account, a savings account. The trust then holds that property for you, and later for the people you name.

Almost every living trust is a revocable living trust, which means you can change it or cancel it. In Washington, that only works if the trust says so: a trust is revocable only if its terms expressly provide that it is (RCW 11.103.030). A well-drafted living trust says it plainly. Our post on revocable vs irrevocable trusts explains the other kind.

A living trust has three roles, and you usually start out in all three:

The Consumer Financial Protection Bureau describes the same three roles in its guide for trustees (CFPB).

How does a living trust work?

Think of it in four stages. Most of the time, you only notice the first one.

1. You sign it. The capacity needed to create a revocable trust in Washington is the same as for a will (RCW 11.103.020). Washington lets an owner create a trust by declaring that she holds the property as trustee (RCW 11.98.008).
2. You fund it. You retitle the house and accounts into the trust's name. More on this below, because it is the step people skip.
3. You live your life. You are the trustee, so you still pay bills, sell the car and change your mind. While you're living, the trustee's duties are owed only to you (RCW 11.103.040).
4. Someone else takes over. If you become unable to manage, or after you die, your successor trustee steps in. In Washington, a named successor trustee who is willing to serve is entitled to act, with notice to current beneficiaries (RCW 11.98.039).

The successor trustee is a fiduciary, which means legally required to act in your interest and follow what you wrote. Our post on what a successor trustee does covers that job step by step.

Funding: the step that makes it work

A trust controls only what you actually put in it. The CFPB guide says it directly: a living trust is ineffective unless the owner moves money or property into it (CFPB).

Funding usually means a new deed for the house and new account titles at the bank and brokerage. Some accounts, like retirement accounts, usually stay in your name with a beneficiary form instead. Your lawyer or document service should tell you which is which.

Something always gets missed: a new account, a car, a refund. That is the job of a pour-over will, which sends leftovers into the trust after you die.

Why do people choose a living trust?

There are three main reasons. Each one is real, and each one has limits.

It can keep property out of probate. In Washington, property in a trust that becomes irrevocable at your death is a "nonprobate asset" (RCW 11.02.005). So your successor trustee can hand it out without a probate case. Anything you left outside the trust may still need probate.

It covers the years before death. If you have a stroke in March, your successor trustee can pay the property tax in April from the trust account. A will does nothing until you die.

It keeps your plans private while you live. While you're living, no beneficiary other than you is entitled to information about a revocable trust in Washington (RCW 11.98.072). Later, your trustee can show banks a short certification of trust that leaves out who inherits (RCW 11.98.075). By contrast, a will is delivered to the court after death (RCW 11.20.010).

What a living trust doesn't do

A living trust is useful, but it isn't a shield. It helps to know its edges before you sign.

A few notes on that right-hand column:

• Medical decisions belong to your medical power of attorney. A trustee manages property only.
• Taxes: under federal tax law, a person who can take back trust property is treated as its owner (26 U.S.C. 676). So the trust's income is reported as yours.
• Creditors: Washington law makes transfers into a trust for your own use void against your creditors (RCW 19.36.020).
• Medicaid: federal law counts the property in a revocable trust as resources available to you (42 U.S.C. 1396p(d)(3)(A)).

A living trust also doesn't replace a financial power of attorney. Your agent under a power of attorney handles what is outside the trust, such as a retirement account or a tax return.

Who should be the successor trustee?

This is the decision that matters most, and it is the one people put off. The successor trustee may manage your house and savings for months, or years if you are unwell for a long stretch.

Look for someone organized, trusted by the people who will inherit, and willing to do the work. Name a backup, too. Our guide to the four roles walks through how to choose for each role, and our comparison of a corporate trustee and an individual trustee weighs family against a trust company.

Here is a typical case, a composite. Ruth, 68, owns her condo and a brokerage account, and she has a terrier named Biscuit. Her trust names a close friend as successor trustee, with written instructions to keep paying the dog walker if Ruth is ever in the hospital.

A Kinly membership includes a revocable trust drafted for your state, and you can name Trella Trust Company as successor trustee, first or behind a person you choose.

Common questions

Do I need a lawyer to set up a living trust?

Not always, but the trust must meet your state's rules and say clearly that it is revocable. Washington requires that a revocable trust expressly say so (RCW 11.103.030). Many people use a lawyer or a service that drafts documents for their state.

Can I change my living trust later?

Yes, if it is revocable and you still have capacity. In Washington you can change it by the method the trust provides or, if that method isn't made exclusive, by a signed writing or a later will that refers to the trust (RCW 11.103.030).

Does a living trust avoid probate completely?

Only for property that is actually in the trust. Anything left in your own name, without a beneficiary form, may still go through probate. A pour-over will catches those leftovers, but they may pass through probate on the way.

Is a living trust the same as a will?

No. A will works only after death and usually goes through probate. A living trust can work during your lifetime, including if you can't manage, and can pass trust property without probate. Our post on will vs trust compares them side by side, and do I need a trust? helps you decide.

Sources

• RCW 11.103.030: Revocation or amendment of trusts (Washington State Legislature)
• RCW 11.103.020: Trustor capacity (Washington State Legislature)
• RCW 11.103.040: Trustor's powers under a revocable trust (Washington State Legislature)
• RCW 11.98.008: Methods of creating a trust (Washington State Legislature)
• RCW 11.98.039: Change of trustee, successor trustee (Washington State Legislature)
• RCW 11.98.072: Trustee notification requirements (Washington State Legislature)
• RCW 11.98.075: Certification of trust (Washington State Legislature)
• RCW 11.02.005: Definitions, including nonprobate asset (Washington State Legislature)
• RCW 11.20.010: Duty of custodian of will (Washington State Legislature)
• RCW 19.36.020: Transfers in trust for grantor void as to creditors (Washington State Legislature)
• 26 U.S.C. 676: Power to revoke (Legal Information Institute)
• 42 U.S.C. 1396p: Treatment of trusts for Medicaid (Legal Information Institute)
• Managing someone else's money: Help for trustees under a revocable living trust (Consumer Financial Protection Bureau)