An inter vivos trust is another word for a living trust, which is a trust created during the grantor's lifetime. The opposite of an inter vivos trust is a trust created upon the grantor's death, which is called a testamentary trust.
An inter vivos trust can be a revocable trust or an irrevocable trust and as part of an estate plan it can provide a secure and private way to transfer assets to beneficiaries outside of the probate process. This gives the inter vivos trust a distinct advantage over wills and testamentary trusts when it comes to leaving an inheritance for a loved one. Additionally, trust assets are off limits to anyone other than the trustee, so inter vivos trusts can also be an important part of elder law and advance planning to protect against elder abuse.
How does an inter vivos trust work?
A trust is a separate entity that holds the grantor's assets. The grantor (also known as the settlor or trustor) is the person who opens the trust, transfers assets into it, and provides instructions as to who is entitled to receive these assets and when. The inter vivos trust can be structured to give money to a trust beneficiary while the grantor is still alive, or it may only pass on assets upon the grantor's death.
There are many different types of trusts so you can create an inter vivos trust tailored to your needs, like a spendthrift trust that limits an beneficiary's access to trust assets, or a joint trust that's intended to hold assets from both spouses. You can even have an inter vivos family trust that’s meant to benefit your family.
The trustee is the person or entity (like a bank or trust company) in charge of distributing trust assets to beneficiaries, as well as handling day to day management of the trust, filing an annual tax return, and paying trust taxes. The grantor may also appoint a co-trustee.
After the grantor dies, beneficiaries can receive the assets without going to probate court. Probate is a legal process that's necessary to prove a will and distribute someone's estate, but an inter vivos trust that's established during your lifetime operates independently.
Learn more about trusts vs wills and how they work together.
They can be revocable or irrevocable
A revocable inter vivos trust, also known as a revocable living trust, is a trust which can be changed and that you create while you're alive. With a revocable trust, the grantor can also choose to act as their own trustee during their lifetime, and they often do because the trust affords them the flexibility to retitle and remove assets or even modify the trust at their discretion. (Learn how to amend a living trust.) After they die, an appointed successor trustee will take over.
An inter vivos trust can also be an irrevocable trust, which is one that you can't amend or revoke except in certain situations. People tend to create an irrevocable trust as part of their estate plan because it can help limit the size of their estate, which has advantages like reducing estate tax, helping to qualify for government benefits, and protecting assets from creditors (as with an asset protection trust).
Learn more about a revocable vs irrevocable trust.
How is an inter vivos trust taxed?
Trusts can generate income — like a rental property you transferred into the trust — and someone will be responsible for paying taxes on it. With a revocable inter vivos trust, the grantor owns the trust property in the eyes of the IRS for income tax purposes, so they must claim the income on their annual return.
On the other hand, irrevocable inter vivos trusts have their own tax identification number. The trustee files a tax return for the irrevocable inter vivos trust and pays necessary taxes with trust funds, separate from the grantor. Keeping the trusts finances separate from the grantor is one of the benefits of an irrevocable trust. If you have further questions about paying trust taxes, consult with a financial advisor or tax professional.
Learn more: How are trusts taxed?
Benefits of an inter vivos trust vs testamentary trust
If you transfer assets into your trust while you’re alive, they can avoid probate, cutting down the cost and time it takes for your beneficiaries to receive an inheritance. A testamentary trust is created through the terms of the will, and so it too will be subject to probate after you die. Similarly, the terms of the testamentary trust are not private since they’re disclosed in the will, which ultimately become public. Trusts, on the other hand, don’t generally become part of the public record.
Here are some of the benefits of using an inter vivos trust as part of your estate plan:
Beneficiaries can receive an inheritance without court hassle
You can decrease the cost of probate
You can keep the details of your estate plan private
Read this guide on how to avoid probate.
Setting up an inter vivos trust
The basic steps to open an inter vivos trust are to:
Create a trust document that lists grantor, beneficiary, and trustees (learn about the difference between a beneficiary and trustee)
Witness and notarize the document
Fund the trust with a bank account (you can use a trust certificate)
Thinking of opening a trust? Read our living trust checklist.
A simple revocable trust may only cost a few hundred through a digital service, while an irrevocable trust will cost thousands, since you may need the assistance of an estate attorney.
Learn more about how much a trust costs.
