Most people have heard of a trust account, but few know what they really are and how they work. Trusts often come to mind when you think of someone very wealthy, but these powerful estate planning tools can be used by anyone. That even includes people of average financial status. Revocable trusts provide many benefits while still being flexible enough to meet your needs should you need to change things. If you think that a revocable trust might be right for your estate plan, then 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?
A revocable trust is a trust that has been created but may be changed, amended, or revoked by the grantor at any time. Many people might still be asking, “what is a trust?” A trust is simply a legal entity that owns assets that are managed by a trustee all for the benefit of one or more beneficiaries. Trusts can either be revocable or irrevocable trusts. As the name implies, an irrevocable trust cannot be changed or amended once it is established.
So, what is a revocable living trust? A revocable living trust is created during the lifetime of the grantor, 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 in the event that the original trustee can no longer serve. In order to fund the trust, the grantor must transfer ownership of assets over to the trust. This may be cash, real estate, bank accounts, retirement accounts, stocks, or nearly any other asset that can be owned by a person. One might even choose to name a trust as the beneficiary of life insurance proceeds. Once these assets are placed into the trust, the trustee will manage these assets according to the trust agreement for the benefit of the beneficiaries. A trust may also be used to pass assets to the beneficiaries and avoid the probate process upon the death of the grantor.
How A Revocable Trust Benefits Your Estate Planning
A revocable trust can provide many benefits when it comes to estate planning, and those benefits are the main reasons that people create trusts. While there are some differences between revocable and irrevocable trusts, many of the benefits are the same. Here are some of the most common benefits of a revocable trust.
Avoidance Of Probate
When someone dies, their estate must go through the probate process for their property to be distributed according to their will. That process can be time consuming and complicated. Not to mention the fact that heirs often get into squabbles and might even challenge the will in probate court. This can tie up the estate in court for years, and no one receives an inheritance until the issues are resolved. A revocable trust allows assets to pass outside of probate; therefore, that entire process can be avoided. This is one of the biggest factors when comparing a living trust against a will.
Privacy
When an estate goes through probate, all the details of the estate become public record. This means that anyone who is interested will be able to learn all the details of your property and financial information. A trust remains private, so you can pass property to beneficiaries without anyone ever knowing the details of the transactions.
Flexibility
A revocable trust is the most flexible type of trust out there. You have the flexibility to change or alter the trust at any time for any reason up until the time of the grantor’s death. You can even revoke it completely and regain ownership of the property you placed into the trust.
No Conservatorship Needed
If the grantor of the trust suffers an incapacity during the grantor’s lifetime, there is no need for the court to appoint a conservator over his affairs. This is the legal process by which the court appoints someone to manage another’s finances and affairs until the incapacity is no longer present. A durable power of attorney can accomplish this as well, but a will does not become valid until the grantor dies.
FDIC Insured
The FDIC, or Federal Deposit Insurance Company, insures bank accounts as well as assets in a trust. While a traditional bank account is only insured up to $250,000, the FDIC insures assets in a trust up to $250,000 per beneficiary. The maximum insurance amount for a trust is $1,250,000 which is substantially higher than most regular financial accounts.
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 trust does come with a higher price tag than a traditional will in most cases. An estate planning attorney may charge anywhere from a few hundred dollars to several thousand dollars to draft the trust paperwork. In addition, you are likely to incur on-going costs for management of the trust. Depending on who you choose as the trustee, they may require a salary to manage the assets of the trust.
No Creditor Protection
Another big drawback to revocable trusts is the fact 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 get their hands on the assets. 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 any estate tax advantages either. Since all the assets of the trust are still technically part of the grantor’s estate, then 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 assets like interest or capital gains. The grantor must claim this income on his or her own 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 its own tax ID number as it simply uses the grantor’s Social Security number. In fact, a revocable trust provides hardly any tax benefits at all. On the other hand, irrevocable trusts can provide a large estate tax exemption with big tax benefits. Irrevocable trusts have drawbacks as well though. Some people attempt to abuse trusts for tax evasion, but that is not a good idea!
The Basics Of A Trust Agreement
There are a few things that must be included in the agreement when setting up a trust for the agreement to be considered valid. 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 notate 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 some cases, yes! A trust can distribute property and assets to beneficiaries after the grantor’s death just like a will. In fact, a trust allows you to completely avoid probate thus getting the assets to those beneficiaries more easily and quickly. However, if you have minor children, then a will is absolutely necessary! 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?
It depends on your personal financial situation and goals. While they are similar in some ways, there are some big differences 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 a very large estate and need the tax benefits of an irrevocable trust. There are pros and cons to each, so you must consult with your estate planning attorney and come to a decision on which one will best fit your needs.
The Bottom Line
Trusts are powerful tools that give a fiduciary duty to a trustee for the management of trust property that benefits the beneficiaries. Whether you need a trust depends on your specific situation, but there are many advantages to using a trust. Making your trust revocable provides great flexibility while still allowing you to pass property to your beneficiaries. If you think you may need to establish a trust, then you should consult with your attorney today.
Frequently Asked Questions
What is a “spendthrift clause”?
The main 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. It prevents a beneficiary from transferring his or her rights to future payments from the trust.
Who owns the property in a revocable trust?
While technically titled in the name of the trust 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 of the property in the trust at any time. The grantor must still claim all property in the trust as part of his or her estate and must continue to pay income taxes on any profits from trust assets.
Who needs a revocable trust?
Anyone who wants to transfer property to a beneficiary could benefit from a revocable trust. This is particularly true if you wish for the details of those transfers to remain private. The details of a trust do not become public record like a will that has been entered to probate, so you can transfer assets privately using a trust.
Can I have both a revocable and irrevocable trust?
Yes, you can absolutely have both types of trusts. There is no reason that a person cannot establish multiple trusts. You can choose to establish 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.