We Set Up a Revocable Trust Thinking We Were Covered. Here's What It Doesn't Do.

When you set up a revocable trust, it may feel like you’ve checked an important box. Your assets could avoid probate, your privacy could be protected and your family could inherit without going through court. But what you may not realize is that a revocable trust only covers part of your estate plan. Here’s what it doesn’t protect.

What a Revocable Trust Actually Does

A revocable trust is primarily designed to keep your assets out of probate. When assets are titled in the trust, they generally pass directly to your beneficiaries without court involvement. That can save time, reduce costs and keep the transfer private.

A revocable trust can also make things easier if you become incapacitated. Instead of asking a court to appoint someone to manage your finances, the successor trustee you named could step in and manage the trust according to your instructions.

Those benefits alone can make a revocable trust worthwhile. The problem begins when you expect it to do more than it was designed to do. Avoiding probate is only one part of estate planning, and a revocable trust does not address every financial or legal issue your family could face.

What a Revocable Trust Doesn’t Do

The key word is revocable. Because you can change or cancel the trust at any time, the law generally continues to treat the assets as yours. That means a revocable trust generally does not protect your assets from creditors while you’re alive. If you’re sued, creditors can typically pursue trust assets just as they could with assets held outside the trust.

The same is true for Medicaid. Because you still control the assets in a revocable trust, they generally count when Medicaid determines your eligibility. Transferring assets into the trust does not protect them from future long-term care costs.

A revocable trust also does not lower your income taxes or reduce estate taxes automatically. During your lifetime, the IRS generally treats you as the owner of the trust assets, so any income the trust earns is typically reported on your personal tax return. A financial advisor can help you figure out which strategies actually reduce your tax exposure.

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When It Still Makes Sense

The IRS typically treats trust income as your personal income, so a revocable trust does not reduce income or estate taxes.

You already know that a revocable trust can help you avoid probate. But did you know that it could also let you decide how and when your beneficiaries receive their inheritance? Instead of leaving assets outright, you can delay distributions, provide for young children or continue managing assets for a beneficiary who may not be ready to handle a large inheritance.

A revocable trust can also give you flexibility while you’re alive. You can change beneficiaries, update instructions or add and remove assets as your circumstances change. That means your estate plan could evolve with your life instead of staying frozen in time.

If your goals also include protecting assets from creditors, preparing for long-term care or reducing estate taxes, you may need additional planning. A financial advisor can work with you to identify gaps in your plan and determine whether additional strategies make sense for your situation.