A revocable living trust can help you protect privacy, avoid probate and protects you in case of incapacitation. But you will also have some limitations. That’s because revocable living trusts can be expensive, and they don’t have direct tax benefits. Here are the pros and cons of a revocable living trust and how you can carefully weigh them before setting one up. SmartAsset:
A financial advisor can help you with living trusts and other estate planning issues, ensuring they line up with your overall financial plan.
What Is a Revocable Living Trust?
A revocable living trust is a document that outlines how your assets will be handled after your death. These assets can include things like bank accounts, investments or property. Because this is a living trust, you create the document while you are still alive. Then, after you die, your assets are transferred to your beneficiaries according to the terms outlined in the document.
The key difference between revocable and irrevocable trusts is that revocable trusts can be changed or canceled at any time. An irrevocable trust is much more difficult to change.
While the trust-maker is usually the trustee while they are alive, you can also name a successor trustee who will take over when the time comes. This person will receive the assets in the trust after your death.
Pros of a Revocable Living Trust
Avoids Probate
Probate can be an expensive and time-consuming process. Fortunately, placing your assets in a revocable living trust means they won’t be subject to probate. This is because the trust remains intact after your death. This allows you, the trust-maker, to choose who should receive your assets. You can specify this and any details of how assets should be distributed when your form the trust.
Protects Your Privacy
Another benefit of avoiding probate is privacy protection. If your assets must go through probate, all the documents filed in court are made public records. That includes your last will and testament and the assets it contains. But when you place your assets in a revocable living trust, they aren’t subject to probate, which means they won’t be made public record.
Protection in Case of Incapacitation
Aging is a part of life, but people can sometimes become chronically ill or disabled, making it difficult for them to act on their own behalf. When this happens, it can result in guardianship or conservatorship that takes control of your assets. A revocable living trust allows you to instead select a successor trustee who assumes control of your assets should you become incapacitated. It also allows you to outline how assets should be administered.
Separation of Assets
In some cases, a revocable living trust may be useful for the purpose of separating assets. For example, you might have a property with significant value from before the time when you were married. If you live in a community property state, a revocable living trust can help you separate your assets from communal assets.
Cons of a Revocable Living Trust
Can Be Expensive
Creating a revocable living trust can take more time and more than writing a will because it requires a lot of work upfront. For instance, you must re-title all assets you want to transfer to the trust. Any assets you don’t re-title may be subject to probate. There may be exceptions, however, like retirement plans, insurance policies, and annuities.
In addition to re-titling assets, you must contact your bank and any relevant entities that hold your assets. This is because all the accounts you want to be owned by the trust must also be updated. As mentioned, this can be a long and expensive process, so it’s not always a good idea unless your estate is complex.
No Tax Benefits
While revocable living trusts do provide some asset protection as mentioned earlier, they don’t have direct tax benefits. This is because you still retain control of the assets while you are alive, and any income on those assets passes through you. This is different from an irrevocable trust, wherein you completely give up control over your assets. But because you still retain control while you are alive with a revocable living trust, income is reported and taxed on your personal tax return.
Doesn’t Protect Against Creditors
This is another area where revocable living trusts provide less protection than irrevocable trusts. Again, because you still retain some control over your assets, they won’t be completely protected against creditors.
Bottom Line
A revocable living trust is a document that allows you to outline who will receive your assets after you die and how those assets should be distributed. Revocable living trusts have a few key benefits, like avoiding probate, privacy protection and protection in the case of incapacitation. However, revocable living trusts can be expensive, don’t have direct tax benefits, and don’t protect against creditors. Carefully weigh these pros and cons against your situation before deciding to set up a revocable living trust.
Tips for Establishing a Revocable Living Trust
- A financial advisor can help you create an estate plan for your family’s needs and goals. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Many estate planners have taken things into their own hands thanks to all the information they can find online. It’s commendable to handle things yourself, but you will need to put in the time and energy to make sure you avoid the common dangers of DIY estate planning.
- For some people, creating a will is enough. If you think that is the case, it’s a good idea to look more into the strengths and limitations of wills. There are also multiple types of wills and the one you need will depend on your situation. To get you started, here are some things to know about making a will.
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