An inter vivos trust, more commonly called a living trust, is a legal arrangement you create during your lifetime to hold and manage assets for the people you want to benefit. The Latin phrase means “between the living,” and it distinguishes this type of trust from a testamentary trust, which is created through a will and takes effect only at death. A trustee manages the property under rules you write, and when the trust is set up correctly, the assets inside it pass to your beneficiaries after you die without going through probate court.
The People Involved
Every trust has three roles. The grantor (also called the settlor or trustor) is the person who creates the trust, puts assets into it, and writes the terms. The trustee manages the property, makes investment decisions, and distributes assets according to those terms. The beneficiary is whoever receives income or property from the trust.
With a revocable living trust, the grantor usually fills all three roles at the start. You create the trust, name yourself as trustee so you keep day-to-day control of your property, and designate yourself as the primary beneficiary during your life. Your financial routine barely changes. You still write checks, buy and sell investments, and use your house the way you always did.
The Successor Trustee
The person who matters most after you is the successor trustee. This is whoever steps in if you become incapacitated or die. Their job includes inventorying trust assets, getting appraisals, paying debts and taxes, and distributing property to the beneficiaries. You can name an individual, a professional fiduciary, or a bank’s trust department. Choosing someone trustworthy and organized for this role is one of the most consequential decisions in the whole process.
Revocable or Irrevocable
The central choice in setting up a living trust is whether it will be revocable or irrevocable. The two serve different purposes, and the tradeoff is control versus protection.
Revocable Living Trusts
A revocable trust gives you maximum flexibility. You can change beneficiaries, swap assets in and out, rewrite distribution terms, or dissolve the trust entirely at any point during your life. Because you keep that level of control, the law treats the assets as still belonging to you. Income is reported on your personal tax return under your Social Security number, and the assets count as part of your taxable estate when you die.
The tax code says so directly. Under 26 U.S.C. ยง 2038, property you’ve transferred while keeping the power to alter, amend, revoke, or terminate the arrangement is pulled back into your gross estate for estate tax purposes.1Office of the Law Revision Counsel. 26 USC 2038 – Revocable Transfers That describes every revocable trust. When the grantor dies, the trust automatically becomes irrevocable, because the person who held the power to change it is gone.2Internal Revenue Service. Certain Revocable and Testamentary Trusts That Wind Up
Irrevocable Trusts
An irrevocable trust works differently. Once you transfer assets into it, you give up ownership and control. You generally cannot change the terms, pull assets back out, or dissolve the arrangement. That loss of control is the point, because it’s what makes the benefits possible.
Since the assets no longer legally belong to you, they fall outside your taxable estate. For 2026, the federal estate tax exemption is $15,000,000 per individual, and assets above that threshold face estate tax up to 40%.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 An irrevocable trust can also shield assets from certain creditors and lawsuits, especially when it contains a spendthrift provision restricting beneficiaries from pledging or assigning their interest. The tradeoff is permanent. Once the assets are in, you cannot easily get them back.
What a Living Trust Actually Does for You
Avoiding Probate
Probate is the court-supervised process of validating a will, paying debts, and distributing a deceased person’s property. It can be slow, expensive, and public. Court filings become part of the public record, revealing what you owned, what you owed, and who inherited what.
A properly funded revocable living trust avoids all of that. Assets held in the trust at your death pass directly to your beneficiaries under the trust terms, without court involvement. The successor trustee handles distribution privately. No judge approves anything, no inventory gets filed, and no one outside the beneficiaries needs to know the details.
The key word is “funded.” Only assets actually titled in the name of the trust avoid probate. If you create a trust but never move your house, bank accounts, or investments into it, those assets still go through probate when you die. This is the most common mistake people make, and it defeats the main reason to have a trust at all.
Planning for Incapacity
A living trust also protects you if you become unable to manage your own finances because of illness, injury, or cognitive decline. Your successor trustee can step in immediately and take over management of trust assets, paying your bills, managing investments, maintaining real estate, and handling day-to-day financial decisions, all without any court involvement.
Without a trust, your family would likely need to petition a court for conservatorship or guardianship over your finances. That process means filing legal papers, presenting medical evidence, waiting for a judge, and dealing with ongoing court oversight for major transactions. It’s slow, public, and expensive, and it can create conflict if family members disagree about who should be in charge.
Creditors and Medicaid: Be Realistic
A revocable living trust gives you no protection from creditors during your life. Because you can dissolve it and take the assets back, courts treat that property as still within your reach. Creditors can pursue trust assets just as easily as they could pursue assets in your personal name.
An irrevocable trust is different. Because you’ve permanently given up ownership, those assets are generally beyond the reach of personal creditors. Timing matters, though. Transferring property to an irrevocable trust shortly before a lawsuit or bankruptcy filing can be challenged as a fraudulent transfer.
The timing issue is especially sharp with Medicaid planning. Federal law sets a 60-month lookback period for asset transfers before a Medicaid application.4Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets If you move assets into an irrevocable trust within five years of applying for Medicaid long-term care benefits, property transferred for less than fair market value triggers a penalty period of ineligibility. The penalty is calculated by dividing the transferred amount by the average monthly cost of nursing home care in your state.
Taxes While You’re Alive and After
A revocable living trust is invisible for income tax purposes while you’re alive. It doesn’t file its own return and doesn’t need a separate tax ID. All income earned by trust assets goes on your personal Form 1040 under your Social Security number, as if the trust weren’t there.
Once the grantor dies and the trust becomes irrevocable, the picture changes. The successor trustee must get a new Employer Identification Number for the trust. If the trust generates more than $600 in annual gross income, the trustee must file IRS Form 1041, and income distributed to beneficiaries is reported to the IRS and to each beneficiary on a Schedule K-1.5Internal Revenue Service. File an Estate Tax Income Tax Return
Irrevocable trusts that keep income inside the trust face compressed tax brackets. For 2026, income above $16,000 is taxed at the top federal rate of 37%.6Internal Revenue Service. 2026 Form 1041-ES An individual does not hit that rate until income exceeds several hundred thousand dollars. The gap gives trustees a strong incentive to distribute income to beneficiaries, who are usually taxed at lower individual rates, rather than letting income accumulate inside the trust.
Setting Up and Funding the Trust
Before any documents get drafted, several decisions need to be made:
- Who serves as trustee now, and who takes over as successor trustee
- Who the beneficiaries are, and in what shares
- Which assets will go into the trust
- Whether beneficiaries receive everything at once, at a certain age, or in installments
An attorney then drafts the trust document, which must be signed following your state’s rules. Most states require the grantor’s signature to be notarized. Some require witnesses. The specifics vary enough that working with a local estate planning attorney is the most reliable way to get this right.
Signing the document creates the legal framework, but the trust accomplishes nothing until you move assets into it. Funding means changing the legal ownership of each asset from your name to the trust’s name. Real estate takes a new deed, recorded with the local recorder’s office. Bank and brokerage accounts have to be retitled through the financial institution. Vehicles, business interests, and other titled property each have their own process.
Assets that pass by beneficiary designation, such as life insurance and retirement accounts, don’t go into the trust the same way. You can name the trust as a beneficiary on those accounts, but doing so with retirement accounts can carry significant tax consequences and deserves careful review with a tax advisor first.
You Still Need a Will
Even with a fully funded living trust, you should have a will. Most estate planners recommend a “pour-over will” as a safety net. It’s easy to acquire new property or open new accounts without remembering to title them in the trust’s name. A pour-over will directs that any assets you own outside the trust at your death be transferred into it.
Those assets still go through probate, since the will has to be processed by a court before the transfer. But the pour-over will makes sure your property ends up distributed under the trust’s terms rather than your state’s default inheritance rules. Without either a trust or a will covering a particular asset, that property passes under intestacy law, which follows a rigid statutory formula that may not match what you would have wanted.