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, providing 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. Connect with a fiduciary advisor today.
What Is a Revocable Living Trust?
At the most basic level, a revocable living trust – also known simply as a revocable trust – is a written document that determines how your assets will be handled 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. (There are also testamentary trusts, which don’t take effect until after you die.) Assets you place in the trust are then transferred to your designated beneficiaries upon your death. What sets a revocable living trust apart is that you can change or cancel the provisions at any time. Hence, the term “revocable” is in its name.
Before we go into more detail about why you should or shouldn’t get a revocable living trust, there are some terms you should understand. (You may also want to brush up on the basics of how trusts work.) Also, know that the exact laws governing trusts vary by state. The rules in Arizona or Florida won’t be the same as those in Oregon or Michigan.
- Grantor: The individual who creates the trust, transfers assets into it and establishes its terms. The grantor retains control over the trust during their lifetime and can modify or revoke it at any time.
- Trustee: The person or entity responsible for managing the trust’s assets according to the grantor’s instructions. Often, the grantor acts as the initial trustee until incapacitation or death.
- Beneficiary: Any individual or organization named in the trust to receive assets. Beneficiaries can include family members, friends or charities, and their distributions may be immediate or conditional based on the trust’s terms.
- Successor trustee: 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.
How to Create a Revocable Living Trust
If you think that a revocable living trust is right for you, get ready. You will have to do most of the work upfront so that the dissemination of your estate is easier down the road. Start by taking an inventory of your assets. Then, think about who you want to inherit your assets and who you can assign as trustees.
Once these decisions are made, work with an 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 the trust is created, transfer ownership of the selected assets into the trust’s name. For some items, all you’ll need to do is list the asset. For others, you’ll have to contact banks, insurance companies and transfer agents to update beneficiaries, issue new investment certificates, retitle cars, and sign new deeds. You’ll also want to establish 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, you will also want to understand how they differ from irrevocable living trusts. To decide which is better for you, let’s look at what differentiates those two types of trusts.
Flexibility
One major advantage of a revocable living trust is that it is adaptable. As mentioned earlier, that means you can alter or even void the trust whenever and however you want. You can remain as 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.
With an irrevocable living trust, you cannot modify or terminate the trust without approval from everyone named in the trust. If you want to remove a beneficiary from an irrevocable trust, that beneficiary needs to agree and sign off. The reason for this inflexibility is that as soon as the grantor signs the documents creating an irrevocable living trust, he or she removes all ownership rights to the assets.
Tax Treatment
Taxes are another important difference between revocable and irrevocable trusts. The assets in a revocable trust are still yours and you will pay taxes accordingly. That includes any income taxes, inheritance taxes or estate taxes. In fact, your revocable trust will have the same Social Security number as you. The effect is that any income from assets in the trust will go on your own tax return. In irrevocable trusts, the assets are no longer yours. They belong to the trust and all taxes are applicable to the trust itself.
One technical thing to note is 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 type of protection that irrevocable trusts offer against creditors. This means that because assets in a revocable trust still belong to the creator of the trust, creditors could go after 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. While a revocable living trust helps ensure seamless financial management and privacy for your estate, a living will communicates your healthcare wishes to medical professionals and loved ones.
A revocable living trust is primarily a financial tool designed to manage your assets during your lifetime and distribute 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, including 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 needed.
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.
Here are six reasons to potentially add a revocable living trust to your estate plan:
1. They Can Be Changed
Revocable living trusts are flexible and allow you to make amendments at your own discretion. That can prove invaluable if your circumstances change or if you just aren’t sure who you want to name as your beneficiaries. That flexibility also makes these trusts a popular option if you are starting your estate planning young.
2. They Cover Your Assets Before Your Death
As outlined above, a living trust covers grantors during three phases of life. If you become incapacitated, your trustee can take over and manage your affairs. (Don’t worry: This person has a fiduciary duty to act in her best interest.) This happens automatically. 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 when you die, your assets will go through probate. That is a court proceeding where your assets are distributed per your stipulations. Probate is a relatively slow process that can take up to several months. If you own property in more than one state, your beneficiaries may have to go through multiple probates.
The costs of going through probate can also cut down on what your beneficiaries inherit. With revocable living trusts, probate is not necessary. 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 for your beneficiaries.
4. Fewer Costs and Hassles Down the Line
Drafting a living trust usually requires more funds and effort upfront because it’s a more complex legal document than a regular trust or will. So that means you will need to spend some time and money to properly set up and maintain your trust. However, that 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 enter into the public records. Anyone can see what stipulations are in your will, who your beneficiaries are and what each beneficiary is inheriting. Estates in a living trust are distributed in private. No one can search the public records to see where your assets went. This protects the privacy of your assets as well as your beneficiaries.
6. FDIC Protection
The FDIC (Federal Deposit Insurance Corporation) typically protects money in a bank account up to $250,000. However, that coverage amount goes up for trust accounts. According to the FDIC, the owner of a revocable trust account receives insurance of up to $250,000 per beneficiary. The maximum insured amount you can have is $1,250,000, equal to $250,000 for the owner and each of the four beneficiaries.
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 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.
These trusts 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.
Bottom Line
A revocable living trust can be an effective tool to incorporate into your estate plan. It offers flexibility that you cannot get from some other trusts or wills. This is especially useful for people who are beginning to plan their estate and are not yet sure who to name as beneficiaries or how to distribute their assets.
Revocable estates will require considerable work upfront to move your assets into the trust, but this usually pays off in the long run. Without the trust, your beneficiaries will need to go through a potentially long and costly probate process.
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 up to three 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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