What Is a Revocable Living Trust?

A revocable living trust is a customizable legal structure designed to manage and distribute assets according to your preferences during your life and after your death. Unlike a traditional will, it avoids the probate process. Therefore, it provides a faster and more confidential way to transfer property to beneficiaries. The grantor establishes the trust by placing assets under its ownership and retains full authority to amend, adjust or dissolve the trust as desired.

A financial advisor with estate planning expertise can help you assess whether a revocable living trust is right for you.

What Is a Revocable Living Trust?

A revocable living trust, also known simply as a revocable trust, is a written document that determines the handling of your assets after you die. Assets can include real estate, valuable possessions, bank accounts and investments.

As with all living trusts, you create it during your lifetime. The assets you place in it then transfer to the designated beneficiaries upon your death. What sets a revocable living trust apart is that you can change or cancel the provisions at any time.

When understanding how trusts work, it is important to identify a few different parties.

• Grantor. The grantor is the individual who creates the trust, funds it and establishes its terms. They retain control over the trust during their lifetime and can modify or revoke it at any time.
• Trustee. The trustee is the person or entity responsible for managing the trust’s assets in accordance with the grantor’s instructions. Often, the grantor acts as the initial trustee until incapacitation or death.
• Beneficiary. A beneficiary is any individual or organization to receive assets from the trust, whether distributions are immediate or conditional. Beneficiaries may be family members, friends or charities.
• Successor trustee. A successor trustee is a person or institution designated to assume management of the trust upon the grantor’s incapacity or death. The successor trustee ensures that the trust’s terms are carried out, including distributing assets to beneficiaries.

Additionally, it is critical to know the exact laws governing trusts in your state. For example, the rules in Arizona and Florida may differ from those in Oregon or Michigan.

Common Reasons to Get a Revocable Living Trust

You may need a revocable living trust to avoid probate, thus making it easier for your heirs to access your assets after you pass. A trust can speed up the process and reduce legal costs, especially if you own property in more than one state. It also helps keep your estate matters private, since trusts are not part of the public record like wills.

A revocable trust is also useful if you want to prepare your assets in case of illness or incapacitation during your lifetime. Your successor trustee can step in without court approval to handle your finances, as directed. This can be helpful if you want to avoid guardianship or conservatorship proceedings.

You might also consider a trust if your estate involves complex instructions. This may include supporting minor children, providing for a dependent with special needs or making staggered distributions over time.

The trust allows you to adjust your plan as your circumstances change, offering more flexibility than a will or an irrevocable trust.

How to Create a Revocable Living Trust

A revocable living trust requires you to do most of the work upfront so the dissemination of your estate is easier down the road.

There are three main steps.

1. Take an inventory of your assets.
2. Decide who you want to inherit your assets.
3. Determine who you can assign as trustees.

Once these decisions are made, work with an estate planning attorney to draft the trust document. This legal document outlines the trust’s terms, including instructions for asset management and distribution. It’s important to ensure that the document complies with state laws and reflects your specific needs.

After you create the trust, you must transfer ownership of the applicable assets into the trust’s name. For some items, all you’ll need to do is list the asset. For others, you may need to contact banks, insurance companies and transfer agents to update beneficiaries, issue new investment certificates, retitle cars and sign new deeds.

You should also consider establishing a pour-over will, which adds unfunded or unallocated assets to your trust.

Revocable vs. Irrevocable Living Trusts

If you’re considering a revocable living trust for your estate plan, it is also important to understand how they differ from irrevocable living trusts.

Flexibility

One major advantage of a revocable living trust is its adaptability.

This type of trust allows you to alter or even revoke it whenever and however you want. You can remain the trustee and retain the ability to make any and all decisions as you see fit. If you decide that you no longer want to give assets to a specific beneficiary, you can remove that beneficiary. This is the opposite of an irrevocable living trust.

You cannot modify or terminate an irrevocable living trust without approval from everyone named in it. If you want to remove a beneficiary from an irrevocable trust, that beneficiary must agree and sign off.

The reason for this inflexibility is that as soon as the grantor signs the documents creating an irrevocable living trust, they remove all ownership rights to the assets.

Tax Treatment

Taxes are another important difference between revocable and irrevocable trusts. Your revocable trust shares your same Social Security number. The effect is that any income from assets in the trust will go on your own tax return.

The assets in a revocable trust are still yours, so you must pay all taxes accordingly, including:

• Income taxes
• Inheritance taxes
• Estate taxes

However, in irrevocable trusts, the assets are no longer yours. They belong to the trust, and all taxes are applicable to the trust itself.

It is important to note that once the grantor dies, a revocable trust becomes irrevocable and cannot be changed.

Legal Protection

You should also note that revocable trusts do not offer the same level of protection against creditors that irrevocable trusts do.

With a revocable trust, assets still belong to the trust’s creator. Therefore, creditors are free to go after these assets to satisfy a judgment.

Living Trusts vs. Living Wills

Although revocable living trusts and living wills are both estate planning tools, they serve different purposes and address distinct aspects of an individual’s wishes.

A revocable living trust helps ensure seamless financial management and privacy for your estate. In comparison, a living will communicates your healthcare wishes to medical professionals and loved ones.

A revocable living trust is primarily a financial tool for managing your assets during your lifetime and distributing them after your death. A living will, on the other hand, deals with your medical preferences and has no involvement in asset management or distribution.

This legal document provides specific instructions regarding your healthcare choices if you are unable to communicate. This includes decisions about life support, resuscitation and other critical end-of-life care.

A living will is often complemented by a healthcare power of attorney, which appoints someone to make medical decisions on your behalf if necessary.

Benefits of a Revocable Living Trust

Financial expert Suze Orman once told CNBC that everyone needs a revocable trust. “A living revocable trust serves as far more than just where assets are to go upon your death, and it does that in an efficient way,” she said.

There are several reasons to add a revocable living trust to your estate plan.

1. Modifiable

Revocable living trusts are flexible, allowing you to make amendments at your own discretion. This can prove invaluable if your circumstances change or you’re unsure who to name as your beneficiaries.

This flexibility also makes these trusts a popular option if you are starting your estate planning young.

2. They Cover Your Assets Before Your Death

A living trust covers grantors during three phases of life.

If you become incapacitated, your trustee can take over the management of your affairs. This person has a fiduciary duty to act in your best interest. This is automatic, so you do not need to go through court proceedings or appointed conservators.

Revocable living trusts also account for guardianship. You can stipulate living situations and spending habits for minor children in the terms of your trust.

3. Probate Avoidance

If you have a will, your assets will go through probate upon your death.

Probate is a relatively slow court proceeding in which your assets are distributed according to your wishes. This can take several months, and your beneficiaries may face multiple probates if you own property in more than one state. There are also costs for probate, reducing your beneficiaries’ overall inheritance. 

With revocable living trusts, probate is not required. Your successor trustee will be able to pass your assets on to your beneficiaries without the need to wait for a court order. That usually means a quicker and more affordable process.

4. Fewer Future Costs

Drafting a living trust usually requires more funds and effort upfront because it’s more complex than a regular trust or will. This means you will need to spend time and money to properly set up and maintain your trust.

However, this work can save you the headache and higher expenses associated with probate. Living trusts also tend to hold up better if someone contests a provision, potentially saving more money and time.

5. Privacy

After your death, wills and their requisite transactions are entered into public record. This means anyone can see your will’s stipulations, beneficiaries and inheritance.

The distribution of assets in a living trust is private, so no one can search public records. This protects the privacy of both your assets and beneficiaries.

6. FDIC Protection 

The Federal Deposit Insurance Corporation (FDIC) typically insures deposits in bank accounts up to $250,000. However, coverage is higher for trust accounts.

Instead, the owner of a revocable trust account receives insurance of up to $250,000 per beneficiary. ¹ The maximum insured amount is $1,250,000, split equally between the owner and each of the four beneficiaries, for a total of $250,000 per beneficiary.

What Are the Disadvantages of a Revocable Living Trust?

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 retitle all assets before transferring them to the trust. Any assets you don’t retitle may be subject to probate. Some exceptions do apply, however, including retirement plans, insurance policies and annuities.

In addition to retitling your assets, you must contact your bank and any other institutions holding them. This is because you must update all the accounts you want the trust to own. This can be a long and expensive process, so it’s not always a good idea unless your estate is complex.

These trusts don’t have direct tax benefits. This is because you retain control of assets while you are alive, so any income on those assets passes through you. This is different from an irrevocable trust, wherein you completely give up control over your assets.

Because you retain control while alive with a revocable living trust, income is reported and taxed on your personal tax return.

Funding and Maintaining a Revocable Living Trust

A revocable living trust only works as intended when it is properly funded.

Transfers

After drafting the document, you must transfer ownership of assets into the trust. This can involve retitling real estate, updating bank and brokerage accounts and contacting financial institutions to record the trust as the new owner. Untransferred assets remain outside the trust and may still be subject to probate unless covered by a separate tool, like a beneficiary designation or a pour-over will.

Funding

Funding the trust is not a one-time task. As you acquire new property, open financial accounts or change investment providers, you may need to bring those assets into the trust as well.

Many people assume their trust covers everything automatically, but unfunded or partially funded trusts are common. They can easily cause delays or confusion when a successor trustee takes over.

Maintainance

A trust also requires periodic maintenance as your personal circumstances change. Marriage, divorce, the birth of children and changes in financial needs can all affect your designations for beneficiaries and successor trustees.

Reviewing the trust from time to time helps ensure that these details remain up to date and that distributions reflect your goals.

Documentation

Because a revocable living trust can be amended during your lifetime, it’s important to document any changes to keep your records organized. Confirming that assets remain properly titled and that instructions are up to date can help the trust function smoothly when it is needed.

Mistakes to Avoid When Setting Up a Revocable Living Trust

Not Funding the Trust

One of the most consequential mistakes a grantor can make is creating a trust but never fully funding it.

The trust document itself does nothing until assets are actually transferred into it. Real estate that remains titled in your personal name, bank accounts that are never updated and investment accounts that still list you as the individual owner all bypass the trust entirely and are subject to probate.

Many people complete the legal paperwork, assume the hard work is done and never follow through on the retitling process. However, the trust only works for the assets actually inside it.

Misusing Retirement Accounts

A related error involves retirement accounts.

Naming your revocable living trust as the direct beneficiary of an IRA or 401(k) can trigger unfavorable tax consequences for your heirs. It may require faster distributions and eliminate certain tax deferral options that would otherwise be available.

In most cases, it is more advantageous to name individuals directly as beneficiaries on retirement accounts and coordinate those designations with the broader terms of your trust.

Naming the Wrong Successor Trustee

Choosing the wrong successor trustee is another mistake that can undermine an otherwise well-constructed plan. Many grantors default to naming a spouse or eldest child without seriously evaluating whether that person is right for the role.

The right successor trustee must have the financial literacy, organizational capacity and emotional steadiness necessary during what will likely be a difficult time. A successor trustee who is overwhelmed, disorganized or in conflict with other beneficiaries can slow the distribution process and create family tension that the trust was meant to prevent.

Failing to Update

Failing to update the trust after major life events is equally problematic.

Divorce, remarriage, the death of a named trustee or beneficiary, the birth of grandchildren and significant changes in financial circumstances can all make existing trust provisions outdated or unworkable. Because a revocable living trust can be amended during your lifetime, there is no reason to leave it unchanged when your situation evolves.

Treating it as a living document rather than a one-time task is essential to keeping it effective.

Neglecting the Greater Estate Plan

Many people also mistakenly assume that a revocable living trust replaces all other estate planning documents.

A trust does not cover healthcare decisions. It also does not appoint someone to manage your finances in any way that falls outside the trust’s scope. A durable power of attorney and a medical power of attorney remain necessary complements to any trust, and overlooking them can leave significant gaps in your overall plan.

A pour-over will is similarly important, serving as a safety net for any assets that were never transferred into the trust during your lifetime.

Bottom Line

A revocable living trust allows you to stay in control of your assets while you’re alive, while helping your heirs avoid probate after you pass. It’s a flexible option for people who are still deciding how to divide their estate or who they want to name as beneficiaries. Setting it up takes effort, since you’ll need to transfer your assets into the trust, but it can save your loved ones time and legal costs later.

Tips for Planning an Estate

• A financial advisor can help you create an estate plan for your family’s needs and goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Thanks to the internet, we have more information than ever right at our fingertips. This has inspired many DIY estate planners to handle their finances on their own. 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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