What's a Revocable Trust?

There are many ways to build a solid estate plan that ensures your property and assets are distributed the way you want after you pass away. While a will is the most common estate planning document, there are many other tools to consider. 

One option is a revocable trust, which provides a way for individuals to manage their financial and personal affairs in the event of death or incapacity. It is often used by those who want more control over the distribution of their assets after they have passed away. 

But how does your revocable trust work? Here’s what you need to know about revocable trusts and if you should get one. 

What is a revocable trust?

A revocable trust, also known as a living trust, is an estate planning tool that allows you to place your assets like real estate property, bank accounts, retirement accounts, or other assets so they can be passed down after you’re gone. It’s a way for you to retain control over the assets held in the trust. 

You’re able to transfer ownership of your assets into the trust while you’re alive and manage your assets from within the trust. The trust can be revoked or modified at any time by you, which is why it is called “revocable.”

With trusts, there are a number of different roles. The grantor is the one who creates (and often funds) the trust. The trustee is the one who manages the trust assets, and has a fiduciary duty to ensure distribution from the trust follows your wishes. The beneficiary is the one who eventually benefits from the trust’s assets. 

When you create a revocable trust, you will appoint yourself as the grantor. You can also name yourself as the trustee, or you can appoint another person to serve in this role. 

The trustee has the legal authority to manage and distribute assets held in the trust, according to your instructions. In some cases, you can appoint a successor trustee, who only takes control of the trust if you become incapacitated. 

Cost to set up a revocable trust 

The cost of setting up a revocable trust depends on the type of trust, the amount of assets being placed in the trust, and other factors. It also depends on if you use an attorney or create one yourself online. Generally speaking, you can expect to pay between $500 and $3,000 to set up a revocable trust. 

Trusts also require maintenance, and depending on who your trustee is, you may need to pay annual fees.  

Revocable trusts VS. irrevocable trusts

An irrevocable trust is a type of estate planning tool that puts conditions on how assets can be distributed and managed. 

The key difference between a revocable and irrevocable trust is that an irrevocable trust cannot be changed once it’s created—once you create it, you relinquish all control and can’t change beneficiaries or adjust the assets in the trust.

Irrevocable trusts are often more complicated and expensive to set up, but do come with some tax advantages and asset protection. 

FYI, revocable trusts become irrevocable once the grantor has passed away. 

Benefits of a revocable living trust

The primary benefit of a revocable trust is that it offers more control over how your assets are distributed after you pass away. 

A revocable trust allows you to keep control of your assets after you die by setting up rules for how the trustee is to manage the assets. You can specify who will receive the assets and when they will receive them.  You can also establish conditions that must be met before distributions are made, such as requiring named beneficiaries to reach a certain age or finish college.

The other main benefit is the ability to avoid probate, or the legal process of following a last will and testament, which is often very time-consuming and costly. When you die, the assets held in the trust can be distributed quickly and privately, as opposed to going through probate court. This can save your family time, money, and stress.

Additional benefits of revocable trusts include: 

  • Protection of your assets during life, disability or death.
  • Flexibility to make changes to the trust as needed.
  • Ability to transfer assets to your loved ones without incurring gift tax or estate tax.
  • Ability to name a trustee who understands your wishes and desires for the trust.
  • Control over how and when assets are distributed after you’re gone.

Disadvantages of revocable living trusts

Although there are many benefits to setting up a revocable trust, there are also some disadvantages. 

For example, a revocable trust is not tax-efficient and does not protect your assets from creditors or lawsuits. Because you can alter the assets in your revocable trust at any time, they’re still considered your assets and will be included in your income tax. They also won’t reduce federal estate tax liability or inheritance taxes. 

Furthermore, if you modify or revoke the trust agreement during your lifetime, it may cause significant confusion for the beneficiaries of the trust when you pass away.

Finally, a revocable trust also requires more paperwork and upkeep than other estate planning tools. You must keep up with the trust documents and make sure they are updated as your life circumstances change. 

Alternatives to a revocable trust 

Whether or not you should get a revocable trust depends on your individual circumstances and goals. You may want to consider getting one if you have assets that would benefit from avoiding the probate process, or if you want more control over how your assets are distributed after you pass away.

If you decide that a revocable trust isn’t right for you, there are other estate planning tools available. For example, you may want to consider setting up a will, which is another way to specify how your assets should be distributed after your death. If you know exactly where you want your assets to go and want to avoid taxes, consider an irrevocable trust or set up a power of attorney.

If you’re looking for simple financial protection to cover your debts if you were to unexpectedly pass away, consider term life insurance, which is often much more affordable.  

A revocable trust is an important part of any estate plan and can help ensure that your wishes are carried out after you have passed away. It is important to consult with an experienced estate planning attorney to help you properly set up and administer your trust.  An attorney can also ensure that your trust is in compliance with all laws and regulations. 

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