What is a revocable living trust?
From what it is to how to set one up, we’ve taken a look at everything you need to know about a revocable living trust.
Summary
Revocable living trusts allow for complete control and ownership of assets in a trust.
Grantors can modify, revoke, or dissolve the trust at any time.
Assets held in a revocable trust bypass probate.
Revocable trusts are private documents not disclosed to the public.
What is a revocable living trust?
A revocable living trust is an estate planning document to manage assets during your lifetime and streamline inheritance.
Imagine a revocable living trust as a box you make to hold your valuable things, like your real estate, money, and other assets. As the creator of this box, you can also make yourself a trustee, meaning you are in charge of everything within it.
The word "revocable" means you can change your mind or even cancel the trust if you want to. This allows you to add or remove assets at any point.
"Living" indicates that you set up and manage the trust while alive. As this could seem unnecessary, such an arrangement could also be called a revocable trust.
The question is, why set up a revocable trust instead of a will? A primary reason is to make settling your estate easier for your beneficiaries after you're no longer around. When you create this trust, you specify who should receive your belongings and who will be responsible for distributing them.
You control the trust while you're alive, saving your loved ones a lot of hassle and delay after you're gone.
How to set up a revocable trust
Setting up a revocable trust involves a few simple steps:
Gather information: First, make a comprehensive list of your assets and decide who you want to inherit them (beneficiaries). Examples of assets to include are your real estate properties, savings, and valuable items.
Choose a trustee: Pick someone you trust to manage your trust (successor trustee) if you can't. Alternatively, consider selecting a professional trustee.
Create the trust document: You can use a template or hire a professional such as a financial advisor or lawyer to create the trust document. This document should clearly outline the assets in the trust and the beneficiaries.
Sign and notarize the document: Sign the completed trust document before a notary to legally bind it.
Transfer your assets: Once the trust is notarized, move the specified assets into the trust. For example, when transferring a property, you must change the title to the trust's name.
Manage the trust: You have complete control over the assets as the trustee. You should continue to manage them as you did before.
Update the trust as needed: If your situation changes (e.g., you acquire or sell assets, or there's a change in beneficiaries), update the trust document accordingly.
If you seek professional assistance setting up a revocable trust, consider working with a financial advisor. Unbiased can pair you with an advisor best suited to your needs and preferences. An advisor will guide you through the process, helping you to consider all your assets, financial needs, plans, and desires. With this information, your SEC-regulated financial advisor will assist you in creating a bespoke plan and trust that aligns with your goals. Get matched with an advisor here.
Revocable living trust vs irrevocable living trust: What is the difference?
Revocable and irrevocable living trusts are legal arrangements for managing estate assets, but they have some key differences.
The table below provides a summary of how they vary:
| Revocable Living Trusts | Irrevocable Living Trusts | |
|---|---|---|
| Revocable Living Trusts | Irrevocable Living Trusts | |
| Revocability | You can change, amend, or even cancel the trust anytime during your lifetime. | Once established, an irrevocable living trust typically can only be changed or revoked with the beneficiaries' consent. |
| Asset Control | You have more flexibility and control over your assets, meaning you can buy, sell, or manage them as you see fit. | You relinquish control over the trust assets, and the trustee manages them to benefit the beneficiaries. |
| Estate Taxes | Trust assets are still considered part of your estate for tax purposes and may be subject to estate taxes when you pass away. | Trust assets are often excluded from your estate, potentially reducing the estate tax burden. |
| Creditor Protection | Trust taxes are generally accessible to your creditors and can be used to pay off your debt should legal issues arise. | Trust assets are usually shielded from creditors, providing more protection against claims or lawsuits. |
| Medicaid Eligibility | When determining your eligibility for Medicaid, they will include your trust assets. Medicaid is a government program that assists with medical costs for low-income individuals. | Trust assets usually aren't factored in when determining Medicaid eligibility, which can be essential for long-term care planning. |
What are the benefits of a revocable trust?
There are several benefits of revocable trusts, making them a popular choice for estate planning. Here are some advantages of these flexible trusts:
Probate avoidance - When you pass away, the assets in your revocable trust can pass directly to your beneficiaries without going through probate. Probate is a court-supervised legal process to validate your will, pay off debts, and distribute your assets.
Privacy - Probate proceedings are public records, meaning anyone can access information about your estate. Such information includes the value of your assets and who receives them. Revocable living trusts, however, are private documents. When transferring assets through a trust, the details remain confidential, providing more privacy for your beneficiaries.
Flexible management - As the grantor of the trust, you control the assets placed in the trust during your lifetime. This means you can buy, sell, and manage these assets as you did before as the trustee of your trust. This control allows you to adapt the trust according to changes in your financial situation or family circumstances.
Incapacity planning - A revocable living trust allows for a smooth management transition if you become physically or mentally incapacitated. You can assign a successor trustee to manage the trust assets on your behalf without court intervention. This can prevent the necessity of a court-appointed guardian or conservator managing your trust.
Continuity of asset management - If you have assets in multiple states, a revocable trust can help avoid the need for numerous probate proceedings in different states. By consolidating your assets in a trust, you simplify the management and distribution process, ensuring a seamless transition for your beneficiaries.
What are the disadvantages of a revocable living trust?
While revocable trusts offer many advantages, they also have some disadvantages. The disadvantages of a revocable living trust include:
Set-up costs - Setting up a trust can be more costly than simply creating a will, as legal fees and paperwork are involved, making it a bit expensive upfront.
Limited creditor protection - Unlike irrevocable living trusts, assets in a revocable trust are generally accessible to your creditors. If you have debts, creditors can still go after the trust assets.
No tax benefits - Revocable trusts do not offer significant tax benefits. Trust assets are usually still considered for tax purposes and may be subject to estate taxes.
Not foolproof for avoiding probate - While trusts can help avoid probate in many cases, sometimes assets need to be properly transferred into the trust. If this happens, those assets might still go through probate, defeating the purpose of having a trust.
Limited Medicaid planning - Trust assets might still be counted for Medicaid eligibility calculations if you're considering Medicaid for potential long-term care needs. This can limit your ability to qualify for Medicaid benefits.
Here's a summary of the benefits and disadvantages of a revocable trust:
Advantages:
Probate avoidance
Privacy for beneficiaries
Flexible management
Incapacity planning
Continuity of asset management
Disadvantages:
Potentially high set-up costs
Limited creditor protection
No tax benefits
Not foolproof for avoiding probate
Limited Medicaid planning
What should I consider when establishing a revocable living trust?
Setting up a revocable trust involves deciding which of your belongings and properties to put into the trust. You must decide who will manage the trust if you can't, and also who the beneficiaries of your assets are when you pass away. While a trust helps avoid probate, it doesn't offer special tax benefits.
Setting up a revocable living trust can be a time-consuming and difficult process. To help ensure you’re making the right financial decisions, it’s wise to get expert advice.
Seek trusted financial advice on setting up a revocable living trust with Unbiased.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.