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

When you create a revocable trust, it can feel like you’ve taken care of an important part of your estate plan. Your assets may avoid probate, your privacy may be preserved and your family may be able to inherit without going through court. But a revocable trust also has important limitations. Here’s what it does not protect.

What Does a Revocable Trust Actually Do?

A revocable trust is mainly designed to keep assets out of probate. When property is properly titled in the trust, it generally passes to your beneficiaries without court involvement. That can save time, reduce costs and keep the transfer more private.

A revocable trust can also help if you become incapacitated. Instead of asking a court to appoint someone to manage your finances, the successor trustee you named may be able to step in and manage the trust according to your instructions.

Those benefits can make a revocable trust valuable on their own. Problems can arise, however, when you expect it to provide protections it was not designed to offer. Avoiding probate is only one part of estate planning, and a revocable trust has limits beyond that role.

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 update beneficiaries, revise 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 may be able to work with you to identify gaps in your plan and determine whether additional strategies make sense for your situation.