Setting Up a Living Trust: Step by Step Guide

Living trusts are an important but often overlooked legal tool. The probate process can be a difficult one, particularly if the affairs of the deceased individual were very complicated. Personal circumstances or complex financial arrangements can make the probate period very unpleasant for loved ones and beneficiaries. Living trusts provide a means by which the process of probate can be avoided.

Broadly speaking, a living trust, also known as an inter vivos trust, can be considered the opposite to a testamentary trust; it is established during the life of the settlor, rather than upon their death. As such, the process for constituting this type of trust is quite different.

Consider your aims

While inter vivos trusts are most commonly used for probate avoidance, they also have a number of other important applications. For example, some people establish living trusts in order to protect their assets from tax or from attack by creditors. Others choose to set up a living trust because it allows them to entrust another individual with certain tasks if they become incapacitated – in a similar manner to a living will.

You should be clear about your aims from the outset. This will help to ensure that the trust deed (the document that establishes the trust) is properly worded.

Revocable or irrevocable?

You must also decide whether you wish for the trust to be revocable or irrevocable. In a revocable trust arrangement the settlor can make changes to the trust at any time. The settlor is often named as the trustee and beneficiary of a revocable trust, and maintains control of the assets. In an irrevocable trust control is given up permanently, and on two practical levels: the settlor gives up practical control of the assets, but also waives their right to change the terms of the trust.

While there are obvious advantages of revocable trust arrangements, you should understand that these are generally inefficient for asset protection purposes as a court is likely to consider that assets settled in this manner remain your property.

Settling your assets

A living trust is established when the settlor (that is, the individual setting up the trust) transfers assets into it. Depending on whether the trust is revocable or irrevocable, this may have little or no practical impact on the day-to-day life of the settlor; you could, for example, theoretically transfer your own house into trust and continue to live in it.

The rules regarding the degree to which the settlor can continue to benefit from the assets are complicated, and will have a significant impact on the success of your trust. For example, attempted avoidance of probate may fail if the assets are judged to have remained yours in all but title. As such, you should always seek professional legal advice before embarking on this process.

The most important element is the trust deed. A properly worded trust document will help ensure that the trust performs the function for which it was established. Make sure that you understand your legal rights, and that you explain your requirements to your solicitor fully in order that your wishes are adhered to.