What is an Inter Vivos Trust and How Does It Work?

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An inter vivos (also known as a living trust) is an estate plan document and fiduciary arrangement that you create while you are alive. It ensures your assets are distributed in your will during your lifetime and after your passing. Latin for “between living”, inter vivos means “between the living”. Inter vivos trusts are named […]

Inter vivos trusts are named after the fact that assets can be transferred while you’re alive, rather than after your death. An inter vivos trust can be used to name beneficiaries for your property just like a will. Inter vivos trusts aren’t required to go through probate, which is a major advantage. Instead, you designate a trustee to oversee trust assets and distribute them upon your death.

How inter vivos trusts work

Once you have set up your inter-vivos trust, and appointed a trustee to manage it, your assets are transferred into the trust’s possession.

The trustee you have appointed assumes the responsibility of distributing trust assets to your beneficiaries upon your death.

Most inter vivos trusts can be revocable, meaning you have full access to the assets and can make any changes while you are alive. However, they can also can be irrevocable.

Unchangeable

— A trust that the grantor can’t change or revoke

How to set up an inter vivos Trust

Many assets can be transferred into an inter-vivos trust.

Bank accounts. These accounts include checking, savings, certificates of deposit, money market accounts, and certificates of deposit. You may also find safe deposit boxes, non-retirement investment accounts such as brokerage and mutual fund accounts.

Bonds, stocks, and other investment assets. Complete a transfer document or reissue assets certificates in trustee’s name.
Life insurance policies. You can transfer ownership to your trust, or name the trust beneficiary.
Real estate. Transfers of land and homes from one state to another are possible.
Limited liability companies. You can transfer your LLC membership interest to an inter vivos trust if you are an LLC member. Before you do this, all LLC stakeholders will need to approve.
Cryptocurrency. It is important to consult an estate lawyer because cryptocurrency is a new concept.
Tangible personal property. You can give jewelry and fine art to your inter-vivos trust.

Some assets are not allowed to go into inter-vivos trusts. Others are still not recommended. These are:

Savings accounts for health. Name the trust your beneficiary.
Retirement assets. It is technically possible to transfer retirement assets into trusts. However, account administrators might treat it as though you have cashed out the account. This could lead to unwanted tax consequences or penalties. Instead, you might consider naming a nontrust beneficiary to the account.
Some vehicles. Some vehicles may not be worth the paperwork required to retitle in trust. If your attorney suggests, classic cars that are collectible may be included in your trust. They tend to appreciate in price.
Cash. Cash cannot be put into trust.
Foreign assets. These assets might not be transferable to a U.S. trust.

The advantages of inter vivos trusts

There are many benefits to creating an inter vivos Trust, such as:

Avoiding the expense and time of probate

. This trust is generally not subject to probate so your trustee can quickly and efficiently distribute your assets to your beneficiaries after your death

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Keeping control of assets. You can transfer assets as often as you like, provided you have a trust that is revocable.
Avoiding conservatorship. If you become incapacitated or unable to manage your affairs, you can name someone of your choosing to be your conservator.
Offering flexibility. Revocable inter-vivos trusts are more flexible than trusts that have a set time or limited use. You can enjoy the benefits of your assets while you live and leave your estate to your beneficiaries after you die. Inter vivos trusts also allow you to divide assets over time. Inter vivos trusts can be active for many years, or even decades, even if you do not want your younger beneficiaries to inherit assets until they are older.
Privacy

. A living trust is not public, unlike a will. Your final wishes are private.

Superior Court of California County of Orange Living Trusts. April 7, 2023.

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Protection against legal challenges It is generally harder to challenge trusts than wills.

The disadvantages of inter-vivos trusts

Inter vivos trusts offer many benefits, but there are also drawbacks.

Cost It usually costs more to create and fund a trust that to prepare a will.
Funding is essential: Your assets must be transferred into the inter-vivos trust during your lifetime. You may lose or neglect to place your assets in trust before you die.
You can’t name guardians and property managers for your children Inter vivos trusts won’t let you name guardians for your kids
No outside oversight : No external forum is able to resolve disputes or clarify any confusion.
You can’t name an executor to your estate. Inter vivos trusts won’t allow you to name an executor. Instead, you designate a trustee to manage your trust assets. A will may also be a good idea. This will name an executor who will manage any assets and wishes that are not covered by the trust.

Tax considerations

A revocable inter-vivos trust will not reduce estate taxes but a will will. This is unlikely to be an issue since most estates do not owe estate taxes. Federal estate taxes are charged at rates ranging from 18% to 40% and apply to assets exceeding $12.06 million in 2022, or $12.92 millions in 2023.

You must report the income from assets in your revocable trust inter vivos to the IRS. This information should be included on your personal tax return.

An irrevocable inter-vivos trust may be a good option if your estate is large enough that it will be subject to estate tax. An irrevocable trust doesn’t count as your estate for tax purposes. This can help reduce estate taxes for your beneficiaries. However, you must be aware that you lose control of assets once you have established an irrevocable trust.

Other types of trusts

You can also form inter vivos trusts. These are just a few of the other types of trusts you can form.

Joint trusts. These trusts can be established by two people (e.g. a married couple).
AB trusts. These trusts, which are similar to a joint trust and can help to reduce estate taxes for married couples.
Testamentary trusts. This type of trust, also known as a trust under will (or a will trust), is created in a will. It doesn’t take place until your death.
Trusts for special needs. Allows someone with a disability or functional need to receive financial assistance, without jeopardizing any means tested government benefits like Medicaid or Supplemental Security income.
Charitable trusts. These trusts are beneficial to charitable organizations and can offer tax benefits to the trust maker.
Blind trusts. This type of trust doesn’t give beneficiaries any prior knowledge about trust assets.
Spendthrift trusts. These trusts are intended to protect the young and the financially irresponsible. Beneficiaries don’t have direct access to trust assets. However, the trustee can give funds to beneficiaries whenever and wherever they choose.
Insurance trusts. These trusts are irrevocable and have only an insurance policy for assets.
Credit shelter trusts. These trusts are designed for the wealthy and help to reduce estate taxes.
QTIP trusts. Qualified terminable interest property trusts are designed for couples. They allow trust income to go to the surviving spouse, while the original funds stay in the trust until that spouse passes away. The trust’s remaining funds are then distributed to the beneficiaries.