What is a living trust?

A trust is an instrument under which a person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the trustee of your own living trust during your lifetime, keeping full control over all property held in trust.

A "living trust" (also called an "inter vivos" trust by attorneys who can't give up Latin) is simply a trust you create while you're alive, rather than one that is created at your death under the terms of your will.

Different kinds of living trusts can enable your estate to avoid probate, reduce or eliminate estate taxes, preserve the inheritance of your heirs, and/or set up long-term asset management.

Do I need a living trust?

The big advantage to making a living trust is that property left through the trust does not have to be administered through probate court before it reaches your desired beneficiaries. In a nutshell, probate is the court-supervised process of paying your debts, giving notice to potential claimants of your estate, and distributing your property to your desired beneficiaries.

The average probate drags on for at least a year or two before the inheritors receive anything. And by that time, there's less for them to receive: in many cases, about 5-10% of the property has been eaten up by lawyer and court fees during the probate process.

Still, not everyone has to worry about probate, and some people don't need a living trust at all. If, however, you own real estate then a living trust is a must.

How does a living trust avoid probate?

Property you transfer into a living trust before your death doesn't go through probate. The successor trustee -- the person you appoint to handle the trust after your death -- simply transfers ownership to the beneficiaries you named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the living trust ceases to exist.

Is it a hassle to own property in a trust?

No, however making a living trust operate effectively does require some crucial paperwork at its inception. For example, if you want to leave your house through the trust, you must execute a new transfer deed, showing that you now own the house as trustee of your living trust. And in California, you will need to use special language in your trust document and in the transfer deeds to avoid unnecessary and unfavorable tax consequences. This paperwork can be complex, but hiring an experienced trust attorney will ensure that the work is done correctly and unnecessary hassles will be enterely avoided.

Is a living trust document ever made public, like a will?

No. A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate -- including inventories of the deceased person's assets and debts, and the named beneficiaries. The terms of a living trust, however, are completely private and do not need to be made public.

Does a living trust protect property from creditors?

Holding assets in a revocable trust doesn't shelter them from creditors. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name.

After your death, however, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). By the time creditors find out about your death, your property may already be dispersed, and the creditors may not know exactly what you owned (except for real estate, which is always a matter of public record). It may not be worth the creditor's time and effort to try to track down the property and demand that the new owners use it to pay your debts.

On the other hand, probate can offer a kind of protection from creditors. During probate, known and (unknown creditors via newspaper) must be notified of the death and given a chance to file claims. If they miss the deadline to file, they forever waive any claims against the estate.

If I make a living trust, do I still need a will?

Yes, you do -- and here's why:

A pour-over will will is an essential back-up device for property or other assets that you don't transfer to yourself as trustee. For example, if you acquire property shortly before you die, you may not think to transfer ownership of it to your trust -- which means that it won't pass under the terms of the trust document. But in your back-up will, you can include a clause that names someone to get any property that you haven't left to a particular person or entity.

If you don't have a will, any property that isn't transferred by your living trust or other probate-avoidance device (such as joint tenancy) will go to your closest relatives in an order determined by state law. These laws may not distribute property in the way you would have chosen.

Can a living trust reduce estate taxes?

A simple probate-avoidance living trust has no effect on taxes. More complicated living trusts, however, can greatly reduce the federal estate tax bill for people who own valuable assets.

An AB living trust is designed primarily for married couples with children. The AB trust goes by many other names, including "credit shelter trust," "exemption trust," and "bypass trust." Each spouse leaves property, in trust, to the other for life, and then to the children. This type of trust can save hundreds of thousands or even millions of dollars in estate taxes, money that will be passed on to the couple's final inheritors.