Inter-Vivos Trusts: How Do They Work?

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, while helping to avoid probate. When creating your estate planning strategy, it is critical to consider whether an inter-vivos trust could be beneficial to your estate.

A financial advisor can guide you through the process of creating an inter-vivos trust while addressing other estate planning needs.

How Inter-Vivos Trusts Work

While a testamentary trust takes effect when the grantor dies, an inter-vivos trust allows an individual or married couple to transfer assets, such as money, real estate or investments, to a separate entity while they are still alive.

An inter-vivos trust can be either revocable or irrevocable.

Revocable trust. When a living trust is revocable, the trustor can change or cancel it. They can even act as its trustee.
Irrevocable trust. An irrevocable trust may not change once it is created. Assets transferred to an irrevocable trust cannot be transferred back to the original owner.

Whether it’s revocable or irrevocable, an inter-vivos trust must have a designated 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.

It’s important to note that 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 safety net, accounting 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 correct party upon your death.

Common Uses of Inter-Vivos Trusts

An inter-vivos trust can serve many purposes beyond avoiding probate.

People use these trusts to manage assets during life, simplify estate transfers and provide for family members under specific conditions.The type of trust you choose depends on the grantor’s overall goals and the type of assets involved.

One common use is to manage assets during incapacity. If the grantor becomes unable to make financial decisions, the successor trustee can immediately step in to handle bills, investments and property management without the need for court involvement. This makes an inter-vivos trust a practical alternative to relying on a power of attorney alone.

Inter-vivos trusts are also used to provide ongoing financial support for family members. Parents may create a trust that distributes income to children over time rather than giving a lump sum. Couples in second marriages often use these trusts to ensure that a surviving spouse can benefit from assets during their lifetime while still preserving the remainder for children from a prior marriage.

Asset protection is another reason people create living trusts. Although revocable trusts do not protect assets from creditors, irrevocable versions can. Once assets are transferred into an irrevocable trust, they are generally no longer considered part of the grantor’s estate. This means they lose protection from lawsuits or claims. It may also reduce future estate taxes.

Finally, inter-vivos trusts are often used to coordinate complex holdings. They can hold out-of-state real estate, manage investment accounts or consolidate business interests under one governing document. This organization makes administration easier for both the trustee and the beneficiaries, reducing the chance of disputes after the grantor’s death.

Advantages of Inter-Vivos Trusts

A couple review how inter-vivos trusts allow estates to avoid probate and transfer assets to beneficiaries.

Property transferred to an inter-vivos trust is not subject to probate, the legal procedure that distributes a deceased person’s assets, according to their will. 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 as it does with a will.

There are also specific benefits associated with living trusts. A revocable trust gives the grantor the option to make changes, like adding new beneficiaries or removing assets.

However, while flexibility is the main advantage of a revocable trust, its counterpart offers more protection for the assets it holds. 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.

An estate planning attorney or financial advisor, especially one with the accredited estate planner (AEP) designation, can streamline the process for you while ensuring that your trust is set up properly.

However, a basic living trust does not have to be overly complicated. It can even be done online. If you prefer to go it alone, you can do this in a few steps.

Type of trust. First, you must decide what kind of trust you want to establish and which assets to transfer into it.
Trustees and beneficiaries. Next, pick a trustee and list your beneficiaries.
Declaration of Trust. Create a Declaration of Trust online and sign it in front of a notary.
Title transfer and storage.Transfer the titles of trust property to the trustee (even if it is you).
Storage. Once complete, be sure to secure safe storage for the document.

While it may save you money, be aware of the potential dangers of DIY estate planning, which can create additional problems for beneficiaries after you are gone.

Bottom Line

A man contemplates the benefits of an inter-vivos trust.

An inter-vivos trust is an estate planning tool designed to help a person or couple transfer assets to beneficiaries without risk of probate. While some trusts go into effect when a person dies, an inter-vivos or living trust is created while the grantor is still alive. They can be revocable or irrevocable and can be created with the help of a professional or you can create one online on your 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 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.