What Is a Revocable Living Trust and How Does It Benefit Estate Planning?

A revocable living trust offers flexibility in estate planning, allowing asset control during life and seamless transfer after death. It avoids probate, ensures privacy, and provides a structured way to manage assets, reducing costs and legal complications for beneficiaries.

By Douglas Wade, Attorney

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Table of Contents

1. How does a revocable living trust work?

2. Set up a living trust with these simple steps

3. Two types of living trusts: revocable and irrevocable

4. Differences between living trusts and living wills

5. What a revocable living trust can do for you

6. What are some bad things about a revocable living trust?

7. Advice on making an estate plan

8. In conclusion

How does a revocable living trust work?

An adaptable legal framework, a revocable living trust allows you to direct the administration and distribution of your assets both during your lifetime and after your passing. It is a quicker and more private way to transfer assets to beneficiaries than a traditional will because it does not go through probate. By transferring ownership of assets to the trust, the grantor creates the trust and maintains complete power to change, alter, or dissolve the trust at any time.

Simply put, a revocable living trust (or revocable trust) is a legal document that specifies the management of your assets upon your death. Property, valuable possessions, financial accounts, and investments are all examples of assets.

You establish it while you are alive, as is the case with all living trusts. (You can also set up a trust that won’t go into force until after you pass away; known as a testamentary trust.) When you establish a trust, any assets you have specified as beneficiaries will receive them when you pass away. The unique feature of a revocable living trust is the ability to modify or terminate its provisions whenever you choose. That is why it contains the word “revocable” in its name.

You should familiarize yourself with these terms before we go into the specifics of revocable living trusts and whether or not you should establish one. (You should probably review the fundamentals of trust law as well.) One more thing: trust laws are specific and differ from state to state. Different states have different regulations; for example, Michigan and Arizona will have different rules.

A grantor is a person who establishes a trust, puts assets into it, and decides how the trust will be structured. The grantor has the power to make changes or cancel the trust at any moment while they are living.

The grantor may name an individual or organization to act as trustee and oversee the administration of the trust’s assets. It is common practice for the grantor to serve as the first trustee until their death or incapacity.

The term “beneficiary” refers to the person or entity designated in the trust deed to receive the assets. The terms of the trust will determine whether distributions to beneficiaries are immediate or conditional; beneficiaries can be anyone from family members to friends to charities.

A successor trustee is an individual or organization named to take over the grantor’s responsibilities in the event of the grantor’s death or incapacity to do so themselves. The distribution of assets to beneficiaries is one of the many tasks performed by the successor trustee in carrying out the trust’s provisions.

Set up a living trust with these simple steps

Get everything you need ready if you’re thinking about creating a revocable living trust. To make the distribution of your estate easier in the future, you will need to accomplish most of the work up front. Make a list of all of your possessions as a first step. Next, consider your options for trustees and beneficiaries of your estate.

Consult a lawyer to draft the trust deed after these options have been considered. This formal document specifies the parameters of the trust and provides directions for the administration and distribution of assets. Verify that the document meets your requirements and is in accordance with state law.

After establishing the trust, you should change the name of the assets you’ve chosen to belong to it. Just listing the asset may be sufficient for certain items. When it comes to updating beneficiaries, issuing new investment certificates, retitling cars, and signing new deeds, you’ll need to get in touch with banks, insurance companies, etc. In addition, you should set up a “pour-over” will that transfers any assets that are not yet committed to a specific beneficiary.

Two types of living trusts: revocable and irrevocable

You should be aware of the differences between irrevocable and revocable living trusts if you are thinking about including one in your estate plan. First, we’ll compare and contrast the two kinds of trusts so you can make an informed decision.

1. Flexibility

The flexibility of a revocable living trust is one of its main benefits. That means you can change or even cancel the trust at any time, as stated before. You can keep your position as trustee and have complete discretion over all matters. You can change or remove a beneficiary at any time if you change your mind about who should receive your assets. An irrevocable living trust is the polar opposite of this.

You need the consent of all the beneficiaries to make changes to or dissolve an irrevocable living trust. A beneficiary’s consent and signature are required to remove them from an irrevocable trust. The creator loses all control over the assets the moment they sign the paperwork making an irrevocable living trust, which is why it is so rigid.

2. Tax Treatment

Another key distinction between irrevocable and revocable trusts is tax treatment. You are still personally liable for taxes on assets held in a revocable trust. All taxes, including income, inheritance, and estate taxes, fall under this category. Your Social Security number will actually be associated with your revocable trust. As a result, you will be required to report on your personal tax return any distributions received from trust assets. You lose ownership of assets held in an irrevocable trust. They are considered trust property and are subject to taxation in the same way as any other business.

A revocable trust can only remain in effect until the grantor’s death, at which point it becomes irrevocable.

3. Safety from Legal Actions

Also, keep in mind that irrevocable trusts provide better protection against creditors than revocable ones. Creditors could pursue assets held in a revocable trust to settle a judgment, as these assets technically still belong to the trust’s creator.

Differences between living trusts and living wills

Although both living wills and revocable living trusts are instruments for estate planning, they are not interchangeable and each handles a unique facet of a person’s objectives. A living will informs healthcare providers and loved ones of your preferences, while a revocable living trust helps with estate administration and privacy.

You can manage your assets while you’re alive and distribute them after you die with the help of a revocable living trust, which is mainly a financial tool. In contrast, a living will only addresses your healthcare wishes and has nothing to do with the administration or distribution of your assets. In the event that you become incapacitated and unable to communicate your healthcare decisions, including those concerning vital signs, resuscitation, and other important end-of-life care, a living will lays out your precise instructions.

Along with a living will, many people also create a healthcare power of attorney to designate another person to act on their behalf when it comes to medical decisions.

What a revocable living trust can do for you

Suze Orman, a financial expert, stated on CNBC that a revocable trust is necessary for everyone. Her argument was that a living revocable trust efficiently served a purpose beyond simply determining what happens to one’s assets when one dies.

Consider including a revocable living trust in your estate plan for the following six reasons:

Their Content Is Modifiable

You have the freedom to make changes to a revocable living trust whenever you choose. In the event that your situation changes or if you are unsure of the people you wish to be named beneficiaries, that can be extremely helpful. Because of their adaptability, these trusts are a good choice for younger people who are just getting their estate plans in order.

Your Assets Are Covered Prior To Your Death

A living trust protects grantors at three points in their lives, as mentioned earlier. If you are unable to manage your own affairs, your trustee can. (You shouldn’t be concerned; this individual has a responsibility to look out for your best interests.) This takes care of itself. Appointed conservators and court processes are unnecessary. One more thing that revocable living trusts cover is guardianship. You have the option to specify where minor children will live and how much money they can spend in your trust.

Preventing Probate

When you pass away, your assets will be subject to probate if you have a will. In that legal process, your assets are divided according to your wishes. Probate is a lengthy procedure that might take months. Your heirs may be subject to more than one probate process if your assets are located in different states.

Beneficiaries may receive less money if you have to pay to have your estate administered through probate. No probate is required when using a revocable living trust. There will be no need to wait for a court order for your successor trustee to transfer your assets to your beneficiaries. Beneficiaries can expect a more streamlined and cost-effective process as a result.

Less Expense and Trouble in the Long Run

Due to its complexity, drafting a living trust typically necessitates more time and resources than a standard trust or will. Setting up and maintaining your trust correctly will require an investment of both time and money. Nevertheless, that effort can spare you the trouble and increased costs of probate. Additionally, living trusts are more likely to survive provision challenges, which could result in time and financial savings.

Confidentiality

Wills and the legal processes surrounding them become part of public record after your death. The terms of your will, the names of your beneficiaries, and the amounts that each will receive are all public knowledge. A living trust allows for the private distribution of estate assets. No one can track your assets through public records searches. Your wealth and the identities of your heirs will remain hidden in this way.

FDIC Protection

The Federal Deposit Insurance Corporation (FDIC) protects up to $250,000 in bank account money. But for trust accounts, that coverage amount increases. The FDIC states that a revocable trust account owner is insured up to $250,000 for each beneficiary. An insured person can have a maximum of $1,250,000, which is $250,000 for the owner and another $250,000 for each of the four beneficiaries.

What are some bad things about a revocable living trust?

Because of the extensive preparation required to establish a revocable living trust, the process can be more time-consuming and costly than drafting a simple will. For instance, before transferring any assets to the trust, you should re-title them. Probate could apply to any assets that you fail to re-title. Nevertheless, there might be a few exceptions, such as annuities, insurance policies, and retirement plans.

Get in touch with your bank and any other relevant entities that have custody of your assets, and don’t forget to re-title them. This is necessary because you need to update all the accounts you want the trust to own. Unless your estate is particularly complicated, this may not be the best course of action due to the time and money it can take.

There are no immediate tax advantages to these trusts. Reason being, while you’re alive, you’re still in charge of the assets, and you get a cut of the income from them. Contrast this with an irrevocable trust, in which case you retain full management authority over the assets. You still need to report and pay taxes on income from a revocable living trust on your personal tax return because you maintain control while you’re alive.

Advice on making an estate plan

Get the advice of a financial planner when you make an estate plan to take care of your loved ones. These days, the internet makes it easy to get more information than ever before. Because of this, a lot of people who aren’t financial experts have decided to plan their estates on their own. It’s admirable that you want to do things on your own, but you’ll have to put in some work to avoid the typical pitfalls of doing your estate planning on your own.

Making a will is sufficient for certain individuals. If you believe that to be true, then you should look into the benefits and drawbacks of wills further. You should also consider your specific circumstances when deciding which of the many will forms is right for you.

In conclusion

When planning your estate, a revocable living trust is one option to consider. It provides a level of adaptability that is unavailable with other types of trusts and wills. When starting to plan an estate, this is particularly helpful for individuals who do not yet have a firm grasp on who should receive what from their assets or who to name as beneficiaries.

There is a lot of legwork involved in transferring assets to a revocable trust, but it’s usually worth it in the end. In the absence of a trust, your heirs will have to endure the probate process, which can be time-consuming and expensive.

Have a quick question? We answered nearly 2000 FAQs.

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What Is a Revocable Living Trust and How Does It Benefit Estate Planning?

How does a revocable living trust work?

Set up a living trust with these simple steps

Two types of living trusts: revocable and irrevocable

Differences between living trusts and living wills

What a revocable living trust can do for you

What are some bad things about a revocable living trust?

Advice on making an estate plan

In conclusion

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