An inter vivos trust, more commonly called a living trust, is a legal arrangement you set up during your lifetime to hold and manage assets for people you choose. You sign the document, transfer property into it, and it starts working immediately. That is the difference between a living trust and a testamentary trust, which only comes into existence after a will is probated. A properly funded living trust keeps assets out of probate court, preserves privacy about your finances, and gives a named successor clear authority to step in if you become incapacitated or die.
The Three Roles Inside the Trust
Every living trust has three roles, and in a typical revocable setup one person fills all three at the start.
The settlor (also called grantor or trustor) is the person who creates the trust, puts property into it, and writes the rules. The trustee holds legal title to the trust property and manages it according to those rules. The trustee owes a fiduciary duty to the beneficiaries, which means acting in their interests rather than the trustee’s own. Most states have adopted a version of the Uniform Prudent Investor Act, which requires trustees to diversify investments, balance risk against return, and judge the portfolio as a whole. The beneficiary is whoever receives income or property from the trust. There can be more than one, and interests can be layered (for example, income to a spouse for life, then the remainder to children).
In most revocable living trusts, you name yourself as both the initial trustee and the primary beneficiary. You keep full control of your property during your lifetime and spend, sell, or invest it exactly as you would without a trust. The document also names a successor trustee to step in when you can no longer serve, following the instructions you wrote without court involvement.
Trustees are entitled to reasonable compensation. Professional fiduciaries like bank trust departments typically charge an annual fee of roughly 1% to 2% of assets under management. A family member serving as trustee may charge less or nothing, but carries the same legal duties.
Revocable or Irrevocable: The Fork That Shapes Everything
Living trusts come in two forms, and the choice between them drives almost every consequence that follows.
Revocable Trusts
A revocable trust can be changed or dissolved at any time while you are alive and competent. You can rewrite distribution rules, swap trustees, add or remove beneficiaries, or pull everything back out. Because you keep that level of control, the law treats trust assets as still yours. Three practical consequences follow: the trust’s income goes on your personal tax return under your Social Security number, your creditors can reach trust assets as if you held them outright, and the full value of the trust is included in your taxable estate at death.
The payoff is not tax savings. It is probate avoidance and incapacity planning. When you die, the successor trustee distributes property under your instructions without a probate filing. If you become incapacitated, the successor trustee can take over immediately, without your family needing to petition a court for guardianship or conservatorship.
Irrevocable Trusts
An irrevocable trust is a one-way door. Once you sign it and transfer property in, you give up the right to pull assets back, change beneficiaries, or alter the terms on your own. The trust becomes a separate legal entity with its own tax identity. Because you no longer control the assets, they are generally outside your taxable estate and generally beyond the reach of your personal creditors.
The tradeoff is loss of flexibility for real financial benefits: creditor protection, estate tax reduction for larger estates, and a foundation for Medicaid asset protection and life insurance planning.
What Happens If the Document Is Silent
Under the Uniform Trust Code, which most states have adopted, a trust is presumed revocable unless the document says otherwise. One other point worth knowing: when the grantor of a revocable trust dies, that trust automatically becomes irrevocable. No one left behind can change it, and the successor trustee is bound by whatever instructions the grantor wrote.
How a Living Trust Is Taxed
Tax treatment turns almost entirely on whether the trust is revocable or irrevocable.
Income Tax
A revocable trust is a “grantor trust” to the IRS. Under Internal Revenue Code Section 676, when the grantor holds the power to revoke, the grantor is treated as the owner of the trust property for income tax purposes.1Office of the Law Revision Counsel. 26 USC 676 – Power to Revoke The trust files no separate return; income, deductions, and credits flow through to your Form 1040.
An irrevocable trust that is not a grantor trust must obtain its own Employer Identification Number and file Form 1041 each year it has taxable income or gross income of $600 or more.2Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 (2025) Trust tax brackets are heavily compressed compared with individual brackets. For 2026, a trust hits the top 37% federal rate on income above $16,000. An individual does not reach that rate until income exceeds roughly $626,000. Retaining income inside an irrevocable trust is often far more expensive than distributing it to beneficiaries, who are then taxed at their own usually lower rates.
Estate Tax
The full value of a revocable trust is included in the grantor’s taxable estate at death. For 2026, the federal estate tax basic exclusion amount is $15,000,000 per individual under the One, Big, Beautiful Bill Act.3Internal Revenue Service. Whats New – Estate and Gift Tax Most estates fall well below that threshold, so estate tax inclusion is a non-issue for the great majority of people. For larger estates, an irrevocable trust can move assets out of the taxable estate.
Step-Up in Basis
A significant tax benefit of a revocable trust is that its assets receive a step-up in cost basis when the grantor dies. Under IRC Section 1014, property held in a trust where the grantor retained the right to revoke takes a new basis equal to fair market value at the date of death.4Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent Stock you bought for $50,000 that is worth $300,000 at your death passes to beneficiaries at the $300,000 value, erasing the capital gains tax on the $250,000 of appreciation.
Assets in a standard irrevocable trust generally do not receive this step-up, because they left the grantor’s estate. The original basis carries forward, and beneficiaries owe capital gains tax on appreciation when they sell. Exceptions exist where trust terms cause the assets to be included in the grantor’s estate for some reason, which can preserve the step-up even in an irrevocable trust.
Gift Tax When Funding
Moving assets into a revocable trust is not a taxable gift, because you can take them back. Funding an irrevocable trust generally is a completed gift. If the value transferred to any single beneficiary exceeds the $19,000 annual gift tax exclusion for 2026, you must file Form 709.3Internal Revenue Service. Whats New – Estate and Gift Tax Gifts of future interests, which most trust transfers are, require Form 709 regardless of the amount.5Internal Revenue Service. Instructions for Form 709 No gift tax is actually due until cumulative lifetime gifts exceed the $15,000,000 exemption, but the filing requirement surprises many grantors.
Funding Is the Step That Makes the Trust Real
A signed trust that owns nothing is just paper. Funding is where most living trusts succeed or fail, and it is the step people most often leave half-done.
Real Estate
Transferring real property requires signing a new deed naming the trust as owner. Depending on the state, that will be a grant deed, warranty deed, or quitclaim deed. The deed must be recorded with the county recorder where the property sits. Recording fees commonly run $25 to $50. Some states also require a transfer tax form or a preliminary change of ownership statement, though most exempt grantor-to-trust transfers from reassessment or transfer tax.
Financial Accounts and Investments
Bank accounts, brokerage accounts, and similar assets are retitled by contacting the institution and providing a copy of the trust or a certificate of trust. A certificate of trust is a shorter document that confirms the trust exists, identifies the trustee, and lists the trustee’s powers, without disclosing beneficiary names or distribution terms. Most banks and brokerages prefer it because they don’t need to review the full agreement.
Pour-Over Will as a Backup
Even with a funded trust, estate planning attorneys almost always recommend a pour-over will. This is a short will that directs any assets you own at death that didn’t make it into the trust to be transferred in. The catch is that anything caught by a pour-over will must still go through probate before reaching the trust. It is a safety net, not a substitute for funding.
What Happens If You Don’t Finish Funding
Any asset not properly titled in the trust at your death will not be governed by the trust. It will pass by beneficiary designation (retirement accounts, life insurance), by joint ownership, or through probate. The single most common reason a living trust “doesn’t work” is that the grantor signed the document and never finished retitling assets.
What Should Not Go Into the Trust
Retirement accounts (IRAs, 401(k)s, and similar tax-deferred plans) should not be retitled in the name of a trust. Changing ownership of a retirement account is treated as a full distribution under IRS rules, triggering income tax on the entire balance and potentially early withdrawal penalties. The correct move is to leave the account in your name and name the trust as the beneficiary, so assets flow in at death without triggering tax.
Health Savings Accounts raise the same problem. Life insurance can be owned by a trust, specifically an irrevocable life insurance trust (ILIT) that keeps the death benefit out of your taxable estate, but transferring an existing policy triggers a three-year waiting period. If you die within those three years, the proceeds are pulled back into your estate for tax purposes. The cleaner approach is to have the ILIT buy a new policy from the start.
Changing or Ending a Living Trust
Changing a revocable trust is straightforward. While you are alive and competent, you can amend provisions with a written amendment, or revoke the trust entirely and start over. Most attorneys recommend a full restatement rather than stacking amendments, because layered amendments can create contradictions.
Irrevocable trusts are harder to change, but “irrevocable” is not “impossible to modify.” In many states, a court can approve modifications when circumstances have changed in ways the grantor didn’t anticipate, when the trust’s tax goals are no longer being met, or when all beneficiaries and the trustee agree. The scope varies significantly by state.
A growing number of states also authorize trust decanting, which lets a trustee pour assets from the original trust into a new one with updated terms. The trustee must have discretionary distribution power under the original trust, the new trust must be consistent with the grantor’s intent, and the trustee cannot use decanting to add new beneficiaries or wipe out an income interest.
Any modification of an irrevocable trust needs careful attention to tax consequences. A change that hands the grantor too much control can reclassify the trust as a grantor trust and pull assets back into the taxable estate, undoing years of planning.
What It Costs to Set One Up
Attorney fees for drafting a living trust typically run $1,500 to $4,000 for a straightforward estate and can exceed $5,000 for situations involving business interests, blended families, or tax planning trusts. Online document services offer a DIY option in the $400 to $1,000 range, though templates may miss state-specific requirements or unusual family circumstances. Beyond drafting, you should budget for deed recording fees, account retitling, and notary charges during funding. The ongoing cost of the trust is small for a self-trusteed revocable trust and higher for one managed by a professional fiduciary charging a percentage of assets.