Even before my kid was born, I started thinking about all kinds of grown-up things I never thought about before.
One of them: how to set up a revocable living trust (aka inter vivos trust) for my family.
I knew generally that trusts are important for good estate planning strategy. But I hadn’t investigated the details. Life is so much simpler when you don’t have a kiddo, and even simpler still when you’re single.
I never appreciated how good I had it pre-kid as much as I do now. 🙂
Recently, I took and passed two bar exams to get licensed to practice law in Hawaii and California (already admitted in New York). Cramming for the bar brought me back up to speed on trust law.
Then I went about creating a family trust and moved all our family assets into it as part of our estate planning strategy. (Note: sometimes different terms are used when talking about trusts, but they all mean the same thing: family trust, revocable living trust, living trust, inter vivos trust.)
I did not hire or use a living trust attorney, and I feel confident that with some research and diligence, you probably don’t need an attorney, either.
Now that it’s over, I’m summarizing my knowledge of trusts into this comprehensive Q&A post as a guide for how trusts work and how to set one up. Note: I was setting up a living trust in California, but this post covers universal trust concepts that generally apply across states. Feel free to skip around, but this is meant to be read top to bottom.
Here’s what we’ll cover:
- What is a trust, how to create one, and what a trust does
- Revocable vs. irrevocable trusts
- Family trusts / living trusts
- Property ownership
- Probate, why avoid it, and how
- Trusts vs. wills
- Requirements for a valid trust
- How to be strategic with a trust
- Different types of trusts, and how to know what’s right for you
- When you don’t need a trust
Note: sometimes different terms are used when talking about trusts, but they all mean the same thing: family trust, living trust, inter vivos trust.
First, what is a revocable living trust?
A trust is a legal arrangement used to manage property. Specifically, it’s a “fiduciary” arrangement, which means: a legal obligation for one person to act for another person’s benefit.
The person whose benefit is being served is called the beneficiary. The person acting on their behalf is called the trustee. The person who sets up the trust is called the grantor.
When a grantor creates a trust, she names a trustee and transfers property to that trustee. Legal title of the property is actually vested in the trustee and “held in trust” by the trustee.
So, grantor entrusts that property to trustee. Trustee then has a legal (fiduciary) obligation to manage that property for the sole benefit of beneficiary.
So, you can think of a trust as simply the relationship between grantor, trustee, and beneficiary over some particular property.
The beneficiary can be (and often is) the grantor. The trustee can also be the grantor. That sounds strange (i.e., how can you be multiple people?), but it’s actually pretty common. And even though words like trustee, beneficiary, and grantor may seem like silly distinctions if they’re all the same person, the distinctions matter because there are legal rights and responsibilities for each role.
How to create a trust
A trust is created (and governed) by a trust agreement, which is a legal document. Kind of like how a corporation is created by articles of incorporation and governed by bylaws.
A trust agreement can be written by a lawyer but doesn’t have to be. It describes how assets put into the trust will be managed and controlled. More on this later.
Unlike a corporation, a trust generally is not considered a legal entity (i.e., “legal person”) – the kind that pays its own taxes, can sue or be sued, or can make political money contributions.
Since trusts are not considered legal persons, you cannot sue them or enter into contracts with them (unenforceable). Instead, you have to name the trustee by name (and refer to them as trustee). You sign contracts with and sue trustees, not trusts.
I’ve heard different terms used to describe different types of trusts. What type of trust are you talking about?
There are different trusts that serve different purposes. Here, I don’t focus on fancy trusts that super rich people use, like:
- credit-shelter trusts
- generation-skipping trusts
- qualified personal residence trusts
For the 99% of us, the estate tax exemption of $11.4M/22.8M (which under Trump’s Tax Cut & Jobs Act is now twice what it used to be…at least through 2025) is more than enough to cover all our wealth when we die. If you’re one of the lucky few whose nest egg exceeds this, get a lawyer to help you structure your trust to reduce estate taxes.
Here, I focus on trusts for the other 99% of us. Specifically, the good old fashioned family trust.
A family trust is also called a living trust or inter vivos trust. They’re the same thing.
A family trust can be either revocable or irrevocable, which just means it can either be changed after the fact, or not.
What exactly does a trust do?
People use trusts for different reasons, but the most common/important ones are:
- Protect wealth (family trust)
- Avoid probate (also family trust)
- Anonymity, so that people don’t know what property you own/control
- Minimize estate taxes when you die (only applies to super rich people)
Trusts can be structured to do any/all of these things.
Should I choose a revocable or irrevocable trust?
There are pros and cons, so depends on your needs. A revocable trust can be changed or cancelled. An irrevocable trust cannot be, but in return you get extra estate tax benefits when transferring assets when you die.
A major downside of irrevocable trusts is that you have to file separate tax returns for them, and the income tax rates are really high. By contrast, revocable trusts don’t require any extra tax filings: just file your personal tax return like normal.
For most people, I recommend a plain vanilla revocable trust.
How does a family trust / living trust work?
At a high level:
- You or your lawyer draft a legal document called a trust agreement
- That agreement describes how you want your property managed
- It may also describe how you want your property distributed when you die
- It also describes who’s involved (trustee, beneficiary, grantor – more on this later)
- It also describes the property to be transferred to the trust
- When you sign, it officially creates the trust
- Once the trust is created, you don’t officially own the property transferred into the trust anymore
- When you die, the trust continues as if nothing happened, and your property continues to be managed according to the trust agreement
- Because grantor’s death has no impact on the trust, the property in the trust avoids probate
This is a very simple view of how a trust works; we’ll dive into the details below.
What do you mean you don’t officially own the property after transferring it to the trust?
You don’t own the property anymore, but you can make it so that you control it and can use it whenever you want.
In that case, do you really care if you technically “own” it? You shouldn’t: for all practical purposes, it’s no different than ownership. And in return, you get the assurance of knowing your property won’t go through probate when you die. Estate planning becomes a breeze. So don’t fret about “owning” your property if you’re ultimately able to control it.
Probate is the process a court of law uses to determine how to distribute assets of someone who has died (i.e., who gets what). It’s used when the deceased has no will.
When deciding how to distribute assets, the court uses certain rules set by the state government. Usually, those rules award all assets to a surviving spouse first. If none, then to surviving children. If none, then to surviving parents. Then siblings. Then other relatives, etc.
People usually prefer to avoid probate. They don’t want the government deciding how to distribute their assets for them.
Why do people want to avoid probate?
Two reasons: it’s time consuming and it’s really expensive.
It can take a year or more to finish probate. Lots of hearings, lots of papers need to be filed. Meanwhile, the deceased’s assets are just sitting there, unproductively.
Plus, the court, lawyers, appraisers, administrative people (judges, officers) all have to get paid. Guess what? They get paid from those assets. And they always get paid first, before beneficiaries.
They typically bite off 10-20% of the entire estate before the remainder is given to beneficiaries. Sometimes, it’s even higher.
Not to mention, the default state rules might not align with your intentions. Family and friends who believe they have a claim to your estate may even sue to get a piece of it, which drains estate resources even further.
So how do you avoid probate?
People who know exactly how they want their assets distributed can simply write down their intentions. If done right, this will shortcut probate.
There’s a couple ways to do this. One: write a will. Two: create a trust.
Note: lawyers and such may point out you can’t technically avoid probate, even with a will or trust, because they technically must still be approved by the probate court.
True. But my point is, a valid will or trust WILL shrink the time and expense of probate pretty much to zero. For all practical purposes that’s the same as avoiding probate entirely.
How are a will vs. trust different?
With a will, the grantor still owns the property. The will simply describes who gets what after grantor dies.
With a trust, grantor no longer owns the property. Grantor transfers the property into the trust and forfeits ownership. Trustee holds title to the property and manages it for the benefit of beneficiaries.
So while both will and trust are created by legal documents, a trust involves giving up ownership to the property.
How are a will vs. trust similar?
Both are used for estate planning, which again is just how you want to distribute your property when you die. However, trusts are less common than wills because they function differently and are more complicated.
Both greatly accelerate probate. With a will, the probate court first determines whether the will is valid. If yes, the court won’t use the default state government rules. It will just follow the will because it’s confident the will reflects grantor’s wishes.
With a trust, probate is even faster because, unlike humans, trusts don’t die. If grantor dies, it doesn’t affect the trust because the trust owns the property and lives on.
But what if grantor is the trustee? In that case, the court will recognize whoever is the successor trustee (most trust agreements specify one).
What if grantor is the beneficiary? Then the court will just follow the beneficiary’s will (assuming a valid will exists), or follow default state government rules if no will exists.
So even though the people named in a trust will all eventually die, the trust itself won’t die, and the probate court will simply find successor trustees/beneficiaries to keep the trust going.
Requirements for a valid trust?
A trust must follow specific criteria to be recognized by a probate court as valid.
1. Grantor must have mental capacity. They must be of sound mind to actually create a trust. This will be inferred based on the circumstances and by reading the trust agreement itself.
2. Grantor must have present intent. They must actually intend to create a trust. A family trust must be in writing to be valid, so intent is usually evidenced by a written trust agreement. Certain magic words in the trust agreement infer/prove intent, like “the property specified in this trust agreement shall be held in trust.”
3. Property must actually be transferred to the trust. Generally, you have to actually transfer property when you create a trust. It can’t be a mere expectancy of property, like an expected inheritance. It has to be property you own right now. Transfer can be literal, like physically handing over a family heirloom. Or symbolic, like writing a grant deed for a house. Or constructive, like retitling property into the trust’s name.
4. You need a trustee. A trustee is appointed to control and manage the trust. They are not acting for their own interest. They are acting for the sole benefit of the beneficiary. They owe a fiduciary duty to the beneficiary.
5. You need a beneficiary. Specifically, an “ascertainable” beneficiary. That person must exist right now, not be theoretical. Beneficiaries don’t have to be humans. They can be: corporations, associations, groups/classes of people, or humans. For family/living trusts, beneficiaries are usually humans.
6. The trust purpose must be valid. That basically means any lawful purpose. Pretty much anything not illegal is OK.
How to be strategic with a trust
You know the reason to use a trust is to avoid probate. But if you’re technically giving up property ownership, how do you make sure the trust manages your property the way you want?
You don’t want the trustee to mismanage your assets by, say, ignoring promising investment opportunities. But you also don’t want them making reckless bets that might squander your assets.
Here are strategies:
1. Make your written trust agreement rock solid. Write into your trust agreement exactly how your assets should be managed. The trust agreement controls, so make it super clear and comprehensive.
It’s hard to predict every scenario that may happen and specify it all in your trust agreement. One way I worked around this was to record a YouTube explainer video to accompany the trust agreement and then reference that video in the trust agreement by explicitly stating the video should be used as evidence if any interpretation ambiguity occurs.
What do I put in that video? I give fuller context and explanation of my rationale for each provision. The purpose is to show the “spirit” of my meaning/intent, and even share examples to illustrate. This way, a fact finder interpreting my trust agreement can use the video to get a better understanding of “what was going through my head” when I wrote it.
This not only makes it faster for a court to get on the same page should ambiguities arise; it also helps prevent infighting (and lawsuits) among heirs which I imagine you want to avoid.
2. Make yourself trustee. You can make yourself both trustee and beneficiary. That’s generally allowed as long as you have at least one additional beneficiary. Your trustee self is a fiduciary to your beneficiary self (and any other beneficiaries). You’ll probably make good choices as a trustee if you’re also a beneficiary impacted by those choices.
3. Or, if not, then make things anonymous. Trusts don’t provide asset protection like LLCs do, but they can provide anonymity. That’s because a trust is created by a private document not required to be filed in any public records. So you need not disclose who the beneficiaries are – i.e. who is actually benefiting from the trust.
Even for irrevocable trusts which must file separate tax returns, you don’t have to reveal the details / inner workings of the trust or who the beneficiaries are.
When the trust does things like buy real estate, file tax returns, sign insurance contracts, etc, only the trustee’s name must be disclosed (because trustee must sign on behalf of the trust).
However, as long as trustee and beneficiary are not the same person, beneficiary’s identity can remain confidential.
This is obviously useful if you don’t want, say, potential creditors to know about certain assets. Likewise, litigants who cannot find out what you actually own will probably think twice about going through the hassle and expense of suing you: if they think there’s no property to go after, they’re less likely to be interested.
I should note this won’t do much good if you are already personally in the “chain of title.” For example, if you originally bought real estate under your own personal name, and then transferred it into a trust where you aren’t the trustee, it doesn’t take much to infer you might also be behind the trust. A creditor worth anything would start digging around to see what else the trust owns.
How I structured my own family trust
I wrote my trust agreement to transfer all our worldly possessions into the trust, then added a pour-over provision in my will.
My wife and I are both grantors and beneficiaries of the trust, but I am the sole trustee. (Hence at least one different person between trustee vs. beneficiary.)
This means I as trustee hold legal title (and owe a fiduciary duty to beneficiaries). I as beneficiary do not. My wife as beneficiary also does not hold legal title. The trust is managed solely for our benefit as beneficiaries. By the terms of our trust agreement we as beneficiaries control the trust property, but don’t own it.
I wrote the trust agreement expansively to put all our property now and in the future into the trust.
In my will, very short, just two pages, I added a pour-over provision that says, “Hey, anything that somehow didn’t get put into the trust should get poured over when I die.”
That might happen if, say, a court doesn’t agree that “future property” could be transferred into the trust (i.e. considers it “mere expectancy”). Or maybe I was named a beneficiary in a relative’s will, and I (not the trust) inherited property but a court didn’t agree this was trust property under the same “future property” provision.
In such situations, my pour over will should catch anything that fell through the cracks and pour it over. This will allow avoiding probate.
I also put spendthrift and support provisions in my trust agreement. Since I as beneficiary don’t own any property anymore, I want to make sure my kids are cared for, but I also don’t want them to become entitled brats who think everything will be handed to them. They have to learn the value of hard work.
So the spendthrift and support provisions, taken together, basically say: “Hey, if my kids fall on hard times, help them. But just their basic living standard until they get back on their feet. Consider all their income sources and limit how much they can get.” This helps prevent them from abusing any knowledge they may have about trust assets to make sure they’re properly motivated to work hard and be good productive citizens.
I believe these basic strategies (family trust + pour over will + spendthrift/support provisions) are applicable/useful to most families.
There are also advanced strategies only applicable to super-rich people, aimed at reducing estate taxes that kick in >$10M net worth. Most people don’t have that much wealth to pass on, so unless you’re one of them this doesn’t apply to you. Google around if you’re really curious, but it’s beyond scope here.
Quick run down of different types of trusts
We have been talking so far about living trusts, i.e., inter vivos trusts, i.e., family trusts.
You might want to know about some other trust types/provisions that do useful things (and don’t just apply to super-rich people).
Specifically (some alluded to above):
- testamentary trusts + pour over provisions
- spendthrift trusts
- discretionary trusts
- support trusts
- charitable trusts
1. Testamentary trusts + pour over provisions. A testamentary trust is a trust created as part of your will. You literally describe the terms of the trust in your will which basically become your trust agreement.
This isn’t that interesting on its own. Until you add a “pour over” provision in your will.
A pour over provision says, “Hey, upon my death, take all my assets which would have otherwise been distributed under my will and immediately ‘pour them over’ into the trust instead.”
Why do this? Simple, to avoid probate while also owning your property.
A testamentary trust + pour over provision combo lets you technically own your property during your lifetime. Then, at the moment you die, the will immediately snaps into effect, creates your testamentary trust, and pours over all your assets into it.
Incidentally, you can also just have a pour over provision without a testamentary trust: they’re separate concepts. But you need something to “pour into” and that thing i.e. trust must have existed before the will was written in order for the pour over provision to be valid.
Your pour over provision cannot reference a non-specific or not-yet-created trust. So if you’re going to have a pour over provision without a testamentary trust, be sure to have an inter vivos trust already in place.
You could also simply specify how your assets should be distributed in your will to accelerate probate, but pouring into a trust expedites probate even faster because there’s literally nothing for the court to administer since trusts don’t die.
Why would you want to own your property during your lifetime if you’re just going to pour it into a trust at death? Maybe you don’t want to deal with the hassle of finding a trustee who isn’t you. Maybe you want to be trustee, but don’t have an additional beneficiary. Maybe you’re not comfortable with the idea of handing over your property. Or maybe you just don’t want to deal with separate estate planning documents (will vs. trust) and rather bundle them together.
2. Spendthrift trusts. A spendthrift trust is a special type of trust that prevents beneficiary from transferring trust property to other people. This is designed to prevent, say, an irresponsible beneficiary from squandering an inheritance funded by the trust.
Another common purpose is to protect beneficiary from the prying hands of creditors who are trying to claim beneficiary’s assets.
A spendthrift trust prohibits both voluntary and involuntary transfers. It’s not valid if beneficiary can voluntarily transfer trust property but not involuntary do so: you don’t get to choose who to shield assets from.
There are some exceptions. For example, when the beneficiary owes the government taxes, or owes child support or alimony. Here, the government will disgorge owed amounts regardless of any spendthrift provision.
A spendthrift trust is also not recognized when grantor is the beneficiary. Grantors cannot plot to use a spendthrift provision to avoid their own creditors.
Aside from these exceptions, a spendthrift trust will not allow creditors to come after assets in the trust. It also will not allow beneficiary to instruct trustee to hand over assets to creditor. That’s what the prohibition on both voluntary and involuntary transfer means: preventing people, whether creditor or beneficiary, from ordering trustee to hand over property.
However, once trustee distributes trust property to beneficiary, it’s no longer held in the trust. It’s in the ownership/possession of beneficiary. And at that point, creditors can claim it. This is because beneficiaries can voluntarily transfer their own personal property to anyone they want (obviously). They can’t do that for spendthrift trust property because they don’t actually own that property yet.
3. Discretionary trusts. This is where trustee has discretion about whether to pay/distribute anything to beneficiary at all. Here, beneficiary isn’t technically entitled to anything. They can only receive trust property if trustee in their discretion decides to give it to them.
This is in contrast to normal living trusts where the trust agreement typically dictates how assets must be managed and distributed, and trustee is acting more as an administrator.
Discretionary trusts are similar to spendthrift trusts in that creditors cannot compel trustee to pay them instead of beneficiary. Trustee truly has sole discretion about whether to pay anything at all.
The only time creditors can go after trust property is after trustee decides to distribute property to beneficiary. In this case, if trustee knows beneficiary owes money to creditor because creditor has given notice to trustee, then trustee must pay creditor directly. If trustee “goes around” creditor and pays beneficiary instead, they may be held personally liable.
But if trustee decides, “You know what, I’m not gonna pay anyone,” then both beneficiary and creditor are SOL.
One exception: if grantor is also beneficiary, then creditors can compel payment. This is based on the same theory that grantor cannot avoid creditors by simply hiding behind a trust entity.
4. Support trusts. Support trusts are where trustee distributes property to beneficiary, but only in an amount necessary to support beneficiary’s basic living standard. It’s like a special type of spendthrift trust.
In a support trust, trustee must consider/evaluate beneficiary’s other income sources when deciding how much to pay beneficiary. When you hear the term “trust fund babies” this is often what they’re talking about.
This is like a spendthrift trust because both voluntary and involuntary transfers are generally prohibited. But here, it’s even stricter because trustee is additionally required to consider beneficiary’s other income sources and limit payments only to amounts necessary for beneficiary’s basic support.
5. Charitable trusts. A charitable trust is created to benefit some social cause. The main difference between a charitable vs. regular trust is that a charitable trust must actually have a charitable purpose, not merely a lawful purpose.
Unlike other trusts, a charitable trust’s beneficiary must also be “unascertained.” That just means you can’t specifically identify an individual person as beneficiary. By contrast, other trusts require an “ascertainable” beneficiary i.e. named individuals identified as beneficiaries. With charitable trusts, you can specify as beneficiaries organizations like non-profits or groups of people like, say, “the orphans of St. Mary’s foster home.” You just can’t name specific individuals.
How do you know what type of trust is right for you?
Depends on your goals, so you have to define those first.
Are you simply looking to arrange your property for your own benefit? (Living trust.)
Or support your children and give them a trust fund? (Support trust.)
Or provide a loved one with economic support while making sure creditors can’t go after them? (Spendthrift trust.)
Your goal determines what type of trust provisions are appropriate, so spend time thinking through your goals first before writing your trust agreement (or hiring a lawyer).
Some types of property do not require a trust
Despite everything you’ve learned so far, there are actually some types of assets that can avoid probate even without a will or trust. So, you get the best of both worlds: no probate, but also no need to hire a lawyer, write a will/trust, or relinquish ownership.
This applies to life insurance policies and retirement accounts like 401ks and pension plans.
For these assets, by simply naming a beneficiary as part of your account, you can avoid probate without any other legal documents. You can split beneficiaries between primary vs. contingent. You can even have a trust be a beneficiary. But you can also just have individuals (spouse, kids, family) as beneficiaries.
So, even without a trust/will, properly named beneficiaries will ensure those assets are distributed at your death according to your wishes with no probate process.
If you have a straightforward estate and most of your wealth is held in these type of accounts, there may not be much urgency to create a trust/will (even though I still recommend them – you never know how your situation might change, and a trust/will is more flexible in this regard).
So, if you’re a procrastinator or just lazy, at least take all of 5 minutes to go name beneficiaries in your insurance/retirement accounts. You get the same no-probate benefit, zero lawyers.
Even if you’re not super rich, you should consider setting up a family trust as part of your estate planning strategy.
Wills vs. trusts are distinct. They serve related but different purposes. They have different rules. They have different implications for your property.
A little investment upfront to create a trust and structure it strategically can save your estate loads of time, money, and headaches when you die by avoiding the hassle and expense of probate. A clear estate plan laid out in your trust can also help prevent infighting by relatives, since there won’t be much to fight about.
Check out the sample trust agreement linked to this article for example language and to see how I structured my own family trust.
And if you want to beef up your estate plan by also drafting a will, be sure to check out my post on how to write a will to make sure you do it the right way!
Discussion: Have you set up a family trust? Any special provisions or strategies you used? Any feedback/questions about the sample trust agreement I linked in this article? Leave a comment below!