Inter-Vivos Trusts: How Do They Work?

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An inter-vivos trust or living trust is a legal arrangement that allows a person to transfer ownership of assets to a trust while they are still alive. Inter-vivos trusts distribute property to beneficiaries when a person dies and helps an estate avoid probate. A financial advisor can guide you through the process of creating an inter-vivos trust and address other estate planning needs.

How Inter-Vivos Trusts Work

While a testamentary trust takes effect when the grantor (person who created it) dies, an inter-vivos trust allows a person or married couple to transfer assets like money, real estate or investments to a separate entity while they are still alive.

An inter-vivos trust can be either revocable or irrevocable. When a living trust is revocable, the trustor can change or cancel it, and can even act as its trustee (person who manages the trust). An irrevocable trust, on the other hand, may not be changed once it is created. Assets transferred to an irrevocable trust cannot be transmitted back to the original owner.

Whether it’s revocable or irrevocable, an inter-vivos trust must have someone assigned as the trustee. Even if the person who established the trust opts to serve as trustee, they still must name a successor trustee to manage the trust when they die. A grantor must also name beneficiaries who will receive assets from the trust at the time of their death.

Last but not least, an inter-vivos trust does not render a will unnecessary. In fact, a will is still needed to execute the trust. Wills can also serve as a backup of sorts and account for any assets not included in the trust. For instance, if you acquire real estate later in life and never added it to the trust, a will can ensure the property is transferred to the proper person at the time of your death.

Advantages of Inter-Vivos Trusts

Property transferred to an inter-vivos trust is not subject to probate, the legal procedure by which a deceased person’s will is processed. This court-supervised process ensures that an estate’s assets are inventoried and distributed properly and that its debts are paid.

By skipping these lengthy and potentially costly proceedings, the assets held by a trust can be smoothly transferred to beneficiaries without becoming public record like a will do.

There are also specific benefits associated with revocable and irrevocable living trusts. A revocable trust gives the grantor the option to add new beneficiaries, remove assets or make other changes. While flexibility is the main advantage of a revocable trust, their counterparts offer more protection for the assets they hold. When a grantor establishes an irrevocable trust, they give up ownership of the assets held by the trust, which protects them from creditors.

How to Create an Inter-Vivos Trust

There are two primary ways to create an inter-vivos trust: enlisting the help of a professional or doing it yourself. A financial advisor, especially one with the accredited estate planner (AEP) designation, or an estate planning attorney can streamline the process for you and ensure that your trust is created properly.

However, a basic living trust doesn’t have to be overly complicated and can even be set up online. If you’re looking to go it alone, you will first need to decide what kind of trust you want to establish and the assets that you’ll transfer to it. Next, you’ll have to pick a trustee and beneficiaries. Then, you’ll create a Declaration of Trust online and sign it in front of a notary. Lastly, you’ll need to transfer the titles of trust property to the trustee (even if it’s you) and then safely store the document.

While it may save you money, be aware of the potential pitfalls and dangers of DIY estate planning, which can create additional problems for beneficiaries when you’re gone.

Bottom Line

An inter-vivos trust is an estate planning tool that helps a person or couple transfer assets to beneficiaries without exposing their estate to the probate system. While some trusts go into effect when a person dies, an inter-vivos or living trust is created when the grantor is still alive. They can be revocable or irrevocable, and can be created with the help of a professional or one’s own.

Estate Planning Tips

  • As mentioned above, a financial advisor who specializes in estate planning can help you navigate what can be a complicated process of planning an estate. SmartAsset’s free matching tool can pair you with up to three local advisors in a matter of minutes. If you’re ready to find a professional, get started now.
  • Depending on the size of your estate and where you live, your assets may be subject to state or federal estate taxes. But remember that up to $11.7 million in assets are exempt from federal estate taxes in 2021. Married couples are also permitted to tap their spouse’s unused portion of this exemption limit, effectively allowing couples to transfer a combined $23.4 million to beneficiaries free of federal estate taxes.

Photo credit: ©iStock.com/Andrii Dodonov, ©iStock.com/fizkes, ©iStock.com/shapecharge

Patrick Villanova, CEPF® Patrick Villanova is a writer for SmartAsset, covering a variety of personal finance topics, including retirement and investing. Before joining SmartAsset, Patrick worked as an editor at The Jersey Journal. His work has also appeared on NJ.com and in The Star-Ledger. Patrick is a graduate of the University of New Hampshire, where he studied English and developed his love of writing. In his free time, he enjoys hiking, trying out new recipes in the kitchen and watching his beloved New York sports teams. A New Jersey native, he currently lives in Jersey City.

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