What a trust is
A trust is a legal arrangement in which one party (the trustee) holds and manages property for the benefit of another party (the beneficiary). A revocable living trust is created during your lifetime, can be amended or revoked at any time while you're alive and competent, and becomes irrevocable at your death.
Despite the formal legal structure, a revocable living trust during your lifetime is largely invisible. You remain the trustee and the primary beneficiary. You manage your assets exactly as you do now, the trust is simply a different form of ownership.
The three roles
Every trust involves three roles, and one person can hold multiple roles simultaneously:
- Grantor (also called settlor or trustor): the person who creates and funds the trust. During your lifetime, this is you.
- Trustee: the person who manages the trust assets. During your lifetime, this is also you. At death or incapacity, your successor trustee takes over.
- Beneficiary: the person who benefits from the trust assets. During your lifetime, you are the primary beneficiary. After death, your named beneficiaries receive the assets.
Funded vs. unfunded trusts
A trust only controls what's in it. A trust document that has never had assets transferred into it is technically valid, and totally useless. "Funding" a trust means re-titling your assets into the trust's name.
For real estate, this means recording a new deed: from "Jane Smith" to "Jane Smith, Trustee of the Jane Smith Revocable Living Trust dated [date]." For bank accounts, it means updating account ownership. For investment accounts, your brokerage handles the retitling.
Some assets, like retirement accounts and life insurance, should usually not be transferred into the trust. Those pass via beneficiary designation. (Putting an IRA in a trust can trigger immediate taxation.)
Funding is the step most people skip, and the one that determines whether your trust actually works. An unfunded trust accomplishes nothing.
During your lifetime
While you're alive and competent, a revocable trust is essentially transparent. You manage trust assets exactly as you manage any other property. You can sell, buy, mortgage, gift, or re-title assets freely. You can amend or revoke the trust at any time.
If you become incapacitated, your successor trustee steps in to manage trust assets, without court involvement. This is one of the most practical advantages of a trust over a will: seamless transition of asset management during incapacity.
After your death
At death, the trust becomes irrevocable. Your successor trustee takes over, inventories trust assets, pays valid debts and expenses, and distributes assets to beneficiaries according to the trust terms, all without court supervision.
Distribution can happen in weeks rather than months. The process is private; the trust document is never filed with a court.
The pour-over will
No matter how carefully you fund a trust, some assets may end up outside it at your death, property acquired late in life, an account you forgot to retitle, or a personal injury settlement. A pour-over will catches these assets and directs them into the trust at death.
The pour-over will does go through probate (for those caught assets), but those assets then join the trust and distribute under its terms.
What a trust doesn't do
- A trust does not replace a will, you still need a pour-over will, and only a will can nominate a guardian for minor children
- A trust does not protect assets from your creditors during your lifetime (revocable trusts are not asset protection vehicles)
- A trust does not avoid estate taxes (the assets are still in your taxable estate)
- A trust does not control assets with beneficiary designations (retirement accounts, life insurance)