Ask people why they work hard and save their money, and often you'll hear that it's not only because they want to raise their own standard of living; they want to leave something behind for their children, too. Understandably, they don't want a big chunk of that money to be used up for probate lawyers' fees or death taxes.

That's where living trusts come in. They don't save you a penny while you're alive, but after death they can eliminate the need for probate--and probate fees--and they can also reduce or eliminate federal estate (death) tax. More of the property you leave goes to the people you want to inherit it.

But there are a confusing variety of living trusts. Most people aren't exactly sure how they work or which kind they need. And paying a lawyer to explain it all may leave you more in the dark--not to mention poorer--than when you started.

Here's a rundown of the basics, so you can decide whether or not you need a living trust and if so, what kind.

The two most common types of living trusts are:


  • a basic living trust (for an individual or couple), which avoids probate, and
  • a " living trust with marital life estate" or AB trust, which both avoids probate and saves on estate tax.

A Basic Living Trust
Unless you expect to owe federal estate tax at your death or your spouse's, a basic living trust to avoid probate may be all the trust you need. It allows property to avoid probate and to pass to the beneficiaries you name quickly and efficiently, without the hassles and expense of probate court proceedings.


A married couple can use one basic living trust to handle both co-owned property and the separate property of either spouse.

To create a basic living trust, you (called the grantor or settlor) transfer ownership of some or all of your property to the living trust. Because you make yourself the " trustee," you don't give up any control over the property you put in trust. If you and your spouse create a trust together, you will be co-trustees.

In the trust document, you name the people or institutions you want to inherit trust property after your death. You can change those choices if you wish; you can also revoke the trust at any time.

When you die, the person you named in the trust document to take over--called the successor trustee--transfers ownership of trust property to the people you want to get it. In most cases, the successor trustee can handle the whole thing in a few weeks with some simple paperwork.

Tax-Saving Trusts
First, the good news: Most people don't need to think about federal estate tax, which kick in only when someone dies owning more than $650,000 to $1 million worth of property, depending on the year of your death. But if you (or you and your spouse) expect to own that much property, consider creating a living trust that will both avoid probate and also save on federal estate tax.

If you don't, there may be a big estate tax bill when the second spouse dies. That's because the survivor's estate includes his or her share of the couple's property plus the property inherited from the deceased spouse.

If you can't leave your spouse property without also saddling his or her estate with a large tax bill, one obvious alternative is to leave much of your property directly to your children or other beneficiaries. But most people want to provide financial security for the surviving spouse--which may not be possible if they leave much property to others.

An AB trust lets a couple pass the maximum amount of property to their children or other beneficiaries after both spouses die, while at the same time ensuring the surviving spouse is financially comfortable. It's one of the few times in life you really can have it both ways.

Here's how it works:
Instead of leaving property outright to the survivor, each spouse leaves most or all of his or her property to a " marital life estate trust." When one spouse dies, the surviving spouse can use that property, with certain restrictions, but doesn't own it outright. That's the reason behind the big tax savings: the property isn't subject to estate tax when the second spouse dies, because the second spouse never legally owned it.

When setting up a marital life estate trust, each spouse names final beneficiaries who will receive the trust's property when the surviving spouse dies. Spouses often name the same people--the couple's children--as final beneficiaries, but it's not mandatory.

Example: Christine and Thierry have a combined estate of $1,100,000, all shared ownership property. If each left his or her half, $550,000, to the surviving spouse outright, that spouse would be left with an estate of $1,100,000. If the surviving spouse died in 2002 with an estate worth $1,100,000, $400,000 would be subject to estate tax.

But if Christine and Thierry each leave their half of the trust property in a living trust with marital life estate, naming their five children as the trust's final beneficiaries, no estate taxes will be due. This is because when the first spouse dies, her $550,000 goes into the marital life estate trust, and is subject to estate tax at this time. But because the amount in the marital life estate trust is less than the federal estate tax threshold, no tax is due. Similarly, when the surviving spouse dies, his $550,000 is not subject to tax.