A trust is simply an empty piece of luggage. Next, you need to pack it. This process isn't as difficult as it may seem: To move an asset into the trust, simply change the title from your name to the trust's name. For example, instead of a home's title being in Jane Smith's name, it would become part of the Jane Smith Living Revocable Trust. Don't worry—you are still in total control here. You can sell your home or refinance your mortgage. Nothing about that changes. You are simply the trustee of the trust while you (and your spouse, or whoever else you designate) are alive; when you die, your successor trustee can take over and follow your instructions without having to go through probate.
In addition to your home, you want to put all savings accounts and nonretirement investment accounts into your trust. Keep your IRA and 401(k) accounts separate from the trust, as they're governed by special rules (I'll explain more in step 5).
3. Have a will as well.
If a revocable living trust protects your major assets from probate, a will is where you carefully specify how you want your noninvestment possessions to be disbursed. Your great-grandma's wedding ring, the heirloom armoire, that cherished first-edition book collection—all of it should be itemized in a will. Do your family a huge favor by being as detailed as possible. Even if your children love each other to pieces now, arguments can easily arise if you don't have everything spelled out. If your children are older, consider asking them to share what would mean the most to them.
4. Don't make young children the beneficiary of any asset.
Laws prohibit anyone under the age of 18 from being able to directly inherit money or assets. If you name a minor as a direct beneficiary of an inheritance or a life insurance policy, you've inadvertently messed things up for him or her. No financial institution will release that money, and your child's guardian will have to jump through legal hoops to wrangle access to the funds to care for your child. Skip the potential mess and costly legal fees by setting up a trust to disburse assets to your child's guardian for the benefit of your child.
5. Double-check who gets what from retirement accounts.
Here's a sad scenario I have seen all too often: A couple gets divorced and divvies up their assets, but neither takes the time to review their beneficiary forms. Years go by. Each person names a new beneficiary in their trust or will—maybe a new spouse or a grown child or dear friend—and thinks they've taken care of matters. But if the ex-spouse was listed as the beneficiary of the IRA or life insurance policy, and that document was never updated, that's who is legally entitled to the money.
I want to be clear here: It does not matter what you say in your will or trust; the beneficiary document attached to your IRA accounts and your life insurance policy overrides what you say elsewhere. If you want to change the beneficiary, you must change the beneficiary document. One important caveat is that if you are married, your spouse is legally the default beneficiary for all 401(k) accounts. If you want to choose an heir other than your spouse, you'll have to file a written waiver (signed by your spouse) with the financial institution. A hassle? Maybe. But taking the steps to set up your estate properly might spare your family a world of woe in the future.