A revocable living trust is a legal instrument that establishes a trust that can be changed or dissolved at any time prior to your death. You usually fund the trust during your lifetime by taking assets you own personally and changing the title on the account into the name of the trust. When properly drafted and executed, it enables you to maintain full control over the assets within the trust while you are living. Upon your death, assets in the trust are not subject to probate, but they are included in your taxable estate. They will pass privately in most states* to the beneficiaries you've named in your trust documents.
Usually you serve as your own trustee, although you could name an institution or another individual to serve in this position. If finance is not your area of expertise, but you still wish to serve as trustee, you can enter into an agency agreement with a bank or other fiduciary to keep records, pay bills, distribute money, or make investment decisions—all subject to your approval.
Because you retain complete control over the trust, the earnings, gains, and losses on the trust's assets are reported on your personal income tax return.
A living trust should be combined with an abbreviated will called a "pour-over will" that has provisions for the executor to "pour" assets that remain subject to your will into the trust after your death to be disposed of as specified in the trust.
A pour-over will is used to "pour over" all the assets subject to your will into your living trust after your death. The pour-over clause instructs that assets not already in the trust at the time of your death be added into the trust by the executor of your estate and disposed of by the trustee as directed in your trust agreement.
Assets added to a trust after your death as directed by a pour-over will do not avoid probate. However, the combination of a pour-over will and a trust still affords increased privacy, since the most detailed information about the disposition of your estate usually resides in the trust agreement, and trust agreements in most states do not have to be filed with the probate court.*