What is a Revocable Trust?
A revocable trust is a formal legal document that places named assets into a trust account. The assets remain in the trust account during your lifetime. The assets will be transferred to the beneficiaries you name in the trust upon your death by a representative you also name in the trust, called a “successor trustee.” The individual that creates a trust is referred to as the grantor, trustor or settlor.
A revocable trust is sometimes considered a more useful estate-planning instrument than a Last Will and Testament. Also called a “living trust,” a revocable trust provides the grantor an organized way to have their assets distributed upon their death while maintaining privacy for their heirs and themselves.
Like a will, a living trust is created while an individual is living and can be changed or canceled at any time. In most instances, the grantor is named as the trustee of the trust and is also the primary beneficiary of the trust while living. Conversely, a will is a formal legal document that spells out how your assets will be distributed upon your death. The executor, named in your will, oversees the distribution process. Most importantly, nothing written in your will goes into effect until after you die.
The Break Down of a Revocable Trust
A revocable trust both protects and manages your assets as the grantor ages. The trust can be amended or “revoked” as you see fit. Depending on the trust’s directions, the trustee will distribute the assets to the named beneficiaries or may hold and manage the assets as you have directed. A living trust remains private and transfers, or converts, to an irrevocable trust upon the death of the grantor.
Key Terms of a Revocable Trust
- The collective assets make up the trust fund.
- The individuals who will benefit from the trust are called the beneficiaries.
- The assets, meaning money or property held in the trust, is the principal of the trust.
- The principal will typically change frequently due to either the expenses of the trustee or the appreciation or depreciation of the assets.
- A living trust avoids probate by listing one or more beneficiaries.
What Does a Revocable Trust Do?
Perhaps the most important thing a revocable trust accomplishes, unlike a will, is it avoids probate. If you have a will, your estate must go through probate-court proceedings where your assets will be distributed, with a judge’s approval, by the executor you named in the will.
For a more basic understanding, we provide insight in our blogpost: Basics of Estate Planning.
A living trust does not have to go through probate, typically meaning a quicker distribution of your assets to your heirs. With a trust, your successor trustee pays off your final debts and then distribute the remaining assets according to your wishes. Additionally, with a will, any property owned in another state will have to go through probate in the state where the property is located. A trust can help avoid this. Distribution of your assets can take months or years with a will, compared to a few weeks with a trust. Both a will and a trust allows you to pick a guardian for your minor children.
A Revocable Trust May Save Money
Whether or not a living trust will save you money depends on several factors, including your financial situation. Initially, drafting a revocable trust will typically cost more than having a will drafted simply because it is a more complicated legal document.
A will typically costs less to draft than a living trust, but will require paying probate court costs. However, court costs are usually nominal for a simple and uncontested will. If contested, trusts will typically hold up better legally than a will if someone challenges the distribution of assets. Court costs for a will contest should also be considered. Additionally, a trust probably holds no financial benefit for individuals with simple estate plans, no significant assets or young couples with no children.
A Revocable Trust Ensures Privacy
Another major difference between and will and a trust is the protection of privacy. A will is public record and probate involves taking an inventory of all assets and paying creditors, with all of the gathered information being made available to the public. Since the main goal of a trust is to avoid probate, and a trust is not made public upon your death, having assets distributed through a revocable trust ensures the privacy of both the grantor and the beneficiaries.
A Revocable Trust Adheres to the Wishes of the Grantor
Like a will, a living trust provides for a contemplative distribution of your assets to your heirs. Trust documents may be modified an unlimited number of times, allowing the distribution of assets to be amended as needed.
Creditor Protection for Beneficiaries of the Revocable Trust
Even though a revocable trust will not provide protection from creditors for the grantor, the trust will provide protection for the trust’s beneficiaries, provided the assets stay in the trust upon the grantor’s passing.
A Revocable Trust Could Reduce State Estate Taxes
There are many misconceptions surrounding living trusts, with one of the biggest being the benefit of a trust for estate-tax purposes. A well-executed revocable trust may provide a reduction in state estate taxes for heirs residing in states imposing an estate tax.
What a Revocable Trust Doesn’t Do
No Tax Benefits for Revocable Trust
A trust does not provide any tax benefits during a grantor’s lifetime. As far as the government is concerned, assets placed in a living trust are identical to those being held in your name.
A Revocable Trust Does Not Fund Itself
A living trust cannot fund itself merely by being created. In order to reap the benefits of the trust, each individual account held by the grantor, such as bank accounts and stock certificates, must be moved into the trust separately. This typically requires changing the beneficiaries on your insurance policies as well as your retirement accounts.
A “pour-over will” will also need to be put in place to provide for the distribution of assets that may have been inadvertently excluded from the trust or are acquired between the time the trust is created and your death. Upon the grantor’s death, the pour-over will transfer all additional assets into the trust, again avoiding probate. If no pour-over will exists, any assets left out of the trust will be required to go through probate.
A Revocable Trust Doesn’t Eliminate the Federal Lifetime Gifting and Estate Tax Exemption
Placing assets into a living trust is not regarded as a gift so it will not affect an individual’s federal lifetime gift or estate-tax exemption. For 2018 the lifetime gift exemption was $11,180,000 per person.
Is a Revocable Trust Right for Me?
Whether or not a revocable trust makes sense for you will depend on your personal situation. While not foolproof, the general rule is that the greater the value of the estate you need to protect the greater the need for a revocable trust. You should discuss your needs with an estate-planning attorney if you have concerns about the need for privacy or your assets going through probate. There are a few additional reasons you may want to consider forming a living trust, including:
- You are holding assets in more than one state.
- You have a complex collection of investments, such as real property or collectibles.
- You have ongoing health concerns, as assets can be managed by a “Disability Trustee” named in the trust, instead of a court-appointed conservator.
For more information, look into our retirement planning services.
A revocable trust is a much-needed tool you will need as you begin the journey of estate planning. It offers some flexibility that can’t otherwise be utilized. This is especially true for those who are younger and are not yet sure who to name as beneficiaries. Any revocable estate will require some work, on the front end, to move assets to a trust, but will pay off in the long run. If you are unsure what option is best for you, what steps you need to take moving forward, or are ready to get started, you can fill out our contact form or give us a call at 888-788-MINK or 888-788-6465.