Most people have heard of a trust account, but few know what they are and how they work. Trusts often come to mind when you think of someone wealthy, but anyone can use these powerful estate planning tools. That even includes people of average financial status.
Revocable trusts provide many benefits while being flexible enough to meet your needs should you want to change things. If you think a revocable trust might suit your estate plan, you have come to the right place.
We will explain everything you need to know about them so that you can make the right decision for your situation.
What Is A Revocable Trust?
After a revocable trust is created, the grantor can still change, amend, or revoke it at any time.
Many people might still be asking, “What is a trust?”
- A trust is a legal entity that owns assets managed by a trustee to benefit one or more beneficiaries. Trusts can either be revocable or irrevocable. As the name implies, an irrevocable trust cannot be changed or amended once established.
So, what is a revocable living trust?
- A revocable living trust is created during the grantor’s lifetime or the person creating and funding the trust. The trust documents will name a trustee and beneficiaries. The trust should also name a successor trustee if the original trustee can no longer serve.
- To fund the trust, the grantor must transfer ownership of assets to the trust. These may be cash, real estate, bank accounts, retirement accounts, stocks, or nearly any other asset a person can own.
- One might even name a trust as the beneficiary of life insurance proceeds. Once these assets are placed in the trust, the trustee will manage them according to the trust agreement for the benefit of the beneficiaries.
A trust may also pass assets to the beneficiaries and avoid the probate process upon the grantor’s death.
KEY TAKEAWAYS
- One of the main reasons for establishing a revocable trust is the ability to transfer assets upon the grantor’s death without going through probate.
- Revocable trusts don’t provide the same creditor protection or tax advantages as an irrevocable trust.
- A revocable trust is one of the most flexible, allowing the grantor to change, amend, or revoke the trust until the grantor’s death.
How A Revocable Trust Benefits Your Estate Planning
A revocable trust can provide many benefits for estate planning, and those benefits are the main reasons people create trusts. While there are some differences between revocable and irrevocable trusts, many benefits are the same.
Here are some of the most common benefits of a revocable trust.
Must read articles related to Trusts
- Overview of “What is a trust?“.
- Deep dive into understanding irrevocable trusts.
- What are the differences between a revocable and irrevocable trust?
- How does a charitable remainder trust work?
- Learn about the benefits of living trusts.
The Downside Of Revocable Living Trusts
Even though revocable living, or inter vivos, trusts have many great benefits; there are also a few downsides to these tools as well.
We will discuss some of the cons of these trusts here that sometimes cause people to choose other estate planning tools.
Higher Costs
Establishing and maintaining a revocable trust usually comes with a higher price tag than a traditional will. An estate planning attorney may charge anywhere from a few hundred to several thousand dollars to draft the trust paperwork.
In addition, you are likely to incur ongoing costs for the management of the trust. Depending on who you choose as the trustee, they may require a salary to manage the trust's assets.
No Creditor Protection
Another big drawback to revocable trusts is that they do not provide any creditor protection to the settlor or grantor. Assets placed into the trust are still considered property of the grantor; therefore, creditors can still take them. Asset protection is a big deal, especially for professionals like doctors and lawyers who may be subject to lawsuits.
No Estate Tax Advantages
Just like a revocable trust does not provide creditor protection, it does not provide estate tax advantages either. Since all the trust assets are still technically part of the grantor’s estate, all the assets will be counted for estate tax purposes. Similarly, since the grantor still owns the assets, the grantor (trustor) is still responsible for income taxes on any income from the holdings like interest or capital gains.
The grantor must claim this income on his or her tax return with the IRS for income tax purposes. A revocable trust is considered a pass-through entity for tax purposes. It does not have a tax ID number as it uses the grantor’s Social Security number.
A revocable trust provides hardly any tax benefits at all. On the other hand, irrevocable trusts can provide an extensive estate tax exemption with significant tax benefits. Irrevocable trusts have drawbacks as well. Some people attempt to abuse trusts for tax evasion, but that is not a good idea!
TIP
You may find it beneficial to create a will, a revocable trust, and an irrevocable trust. All three can form a robust estate planning strategy.
The Basics Of A Trust Agreement
For the agreement to be considered valid, a few things must be included when setting up a trust.
- At a minimum, the trust must name a trustee and beneficiaries.
- It should also direct the trustee on how to manage the assets of the trust. These would be known as the terms of the trust.
- It may name a co-trustee or successor trustee, but that is not absolutely necessary.
- The trust may list specific trust assets that will be included, or it may remain generic and allow the grantor to place any assets they choose to become trust property into the trust.
- The agreement should also note which kind of trust is being established since there are many types of trusts.
Revocable Trust vs Will — Do You Need Both?
There are some key differences between a trust and a will, so do you need both of them? In most cases, yes!
A trust can distribute property and assets to beneficiaries after the grantor’s death, just like a will. A trust allows you to avoid probate, thus enabling the assets to be transferred to those beneficiaries more easily and quickly.
However, if you have minor children, then a will is essential! You can use a will to name guardians for your minor children in the event of your death, but a trust cannot accomplish this important task.
Revocable Trust vs Irrevocable Trust — Which Is Better?
The type of trust you choose will depend on your individual financial situation and goals.
While they are similar in some ways, some significant differences exist between revocable and irrevocable trusts. You might need the flexibility of a revocable living trust (also known as a grantor trust), so that would be your best option.
On the other hand, maybe you have an extensive estate and need the tax benefits of an irrevocable trust.
Each has pros and cons, so you must consult with your estate planning attorney and decide which one best suits your needs.
The Bottom Line
Trusts are powerful tools that entrust a trustee with a fiduciary duty to manage trust property in a way that benefits the beneficiaries.
Whether you need a trust depends on your specific situation, but there are many advantages to using one. Making your trust revocable provides excellent flexibility while still allowing you to pass property to your beneficiaries.
If you think you may need to establish a trust, consult with your attorney today.
Frequently Asked Questions
Anyone who wants to transfer property to a beneficiary could benefit from a revocable trust. This is particularly true if you wish those transfer details to remain private.
The details of a trust do not become public records like a will entered into probate, so you can transfer assets privately using a trust.
While technically titled in the trust’s name and owned by the trust, the grantor essentially retains ownership rights of the property in a revocable trust.
Since the trust may be changed or revoked at any time, the grantor may reclaim any property from the trust at any time.
The grantor must still claim all property in the trust as part of his or her estate and continue to pay income taxes on any profits from trust assets.
Yes, you can have both types of trusts. There is no reason that a person cannot establish multiple trusts. You can develop some of these as revocable and some as irrevocable.
A grantor may choose to establish as many trusts as he wishes, and having a combination of revocable and irrevocable trusts may provide a great mix of flexibility and tax benefits for your estate.
The primary purpose of a spendthrift clause is to prevent beneficiaries from wasting their inheritance.
Most trusts contain one of these clauses. Essentially, a spendthrift clause prevents a beneficiary from securing or obtaining credit based on future trust payments or from transferring his or her rights to future payments from the trust.
You can find a Social Security Administration office near you by using our SSA office locator and searching for your closest location.
