What Is a Revocable Trust?
A revocable trust, also known as a living trust, is an estate-planning document created when you’re alive. After you die, assets placed in the trust are distributed to your designated beneficiaries by an appointed trustee. Revocable trusts can be amended and changed during your lifetime.
What Does a Revocable Trust Do?
A trust can be used in an estate plan to determine how your assets are distributed after you die. There are two main types of trusts: Revocable and irrevocable.
Unlike an irrevocable trust — which typically can’t be terminated or amended — a revocable trust offers flexibility during retirement planning. However, living trusts do not enjoy the same tax benefits as their irrevocable counterparts.
There are three parties involved in a revocable trust: The grantor or trustor, the trustee and the beneficiary.
The grantor or trustor is the person who creates the trust, while the trustee is charged with distributing the trustor’s assets after death. A trustee may also be assigned to manage assets within the trust if the grantor becomes incapacitated.
Finally, beneficiaries are the people who inherit or benefit from the trust.
The main purpose of a revocable trust is to avoid probate.
How to Create a Revocable Trust
Because revocable trusts can be complex, an attorney is needed to draft this legal document.
As the creator of the trust, you can name anyone as a trustee — including yourself. Some people prefer to designate a bank, trust company or lawyer to fill this role instead.
If you name yourself as the trustee, you should also designate a successor trustee. This person will manage the trust when you are no longer able to do so.
Once a revocable trust is established, you must open a trust fund account in the name of your trust.
Then, you need to fund it. This is the process of placing assets — including real estate, cash, investments and other property — into the trust.
The timeline for creating a revocable trust varies. Establishing one for a large estate with multiple beneficiaries will take longer than creating a trust to hold just a few assets for a single beneficiary.
Benefits of Living Trusts
Revocable trusts can offer several benefits that a traditional will may not.
- Avoids Probate
- Many people wish to spare loved ones of probate. This is a legal process where a judge validates a will and makes sure assets are correctly distributed. Probate can be time consuming, cumbersome and expensive, which is why some people try to avoid it.
- Probate is a public process. And once it’s over, wills become public record, meaning anyone can request a copy from the probate court. However, assets in a trust are managed separately from probate. This can protect your privacy along with the privacy of your beneficiaries.
- Revocable trusts are flexible and allow you to make changes until your death. It can be easier to make amendments to a revocable trust than to a will. You may also choose to terminate a revocable trust at any time.
- Provisions for Minor Children
- If a beneficiary is not of legal age, assets can be held in a revocable trust rather than having the court appoint a guardian. This way, the trustee you select manages the inheritance for your children or grandchildren until they reach a specified age or meet certain requirements.
Drawbacks of a Revocable Trust
While revocable trusts provide many benefits, they aren’t right for everyone. Some people, especially those with modest estates, may find it easier and more affordable to utilize a simple will to pass along assets to loved ones.
- A trust costs more money to establish than a will. For example, it can cost between $1,000 and $3,000 to create a revocable trust, compared to $300 or less for a last will and testament. Administering and updating the trust over time may also add expenses. In general, trusts tend to be more complex than wills.
- Unlike irrevocable trusts, revocable trusts provide no real tax benefit. In the eyes of the government, assets in a revocable trust are still yours and you will pay taxes accordingly. This means that any income from assets in the trust — such as real estate that gains value over time — will go on your own income return and be included in your total taxable estate after you die.
- You must retitle any assets you wish to place inside a revocable trust. This means physically changing the ownership of your belongings — such as the title to a car or deed to a home — from your name to the name of your trust. This can be time consuming. If you don't retitle your assets, or forget to include one, these belongings won't pass through the trust and will instead go through probate.
7 Cited Research Articles
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- Internal Revenue Service. (2019, December 19). Charitable Trusts. Retrieved from https://www.irs.gov/charities-non-profits/private-foundations/charitable-trusts
- Bryant Quinn, J. (2019, October 22). The Pros and Cons of Living Trusts. Retrieved from https://www.aarp.org/money/budgeting-saving/info-2019/living-trust-uses.html
- Carlson, B. (2019, August 28). Wills Vs. Trusts: Which Is Best For You? Retrieved from https://www.forbes.com/sites/bobcarlson/2019/08/28/wills-vs-trusts-which-is-best-for-you/#1cdffa937abd
- Ruce, J. P. (2019, July 22). What is a Revocable Trust and Do I Need One? Retrieved from https://www.kiplinger.com/article/retirement/t021-c032-s014-what-is-a-revocable-trust-and-do-i-need-one.html
- American Bar Association. (n.d.). Revocable Trusts. Retrieved from https://www.americanbar.org/groups/real_property_trust_estate/resources/estate_planning/revocable_trusts/
- CNN Money. (n.d.). Do I need a trust? Retrieved from https://money.cnn.com/retirement/guide/estateplanning_trusts.moneymag/index4.htm?iid=EL