A revocable trust, also known as a living trust, can be an important estate-planning document. It lets you remain in control of assets while you’re living and allows heirs to avoid the delays of probate, so they can get access to those assets faster when you pass away. Find out more about revocable trusts, including the potential benefits and disadvantages of this estate-planning option, so you can make an educated decision about wealth management now and for the future.
What Is a Revocable Trust?
A revocable trust is one you create for use during your lifetime and can easily make changes to. Because the trust is revocable, you can change certain details, including the provisions governing it, who the beneficiaries are, and what assets are held in it. You can also dissolve the trust, so it doesn’t exist anymore. As the creator, or grantor, of the trust, you typically get any income generated by the assets held in it as long as you’re alive. You can also name yourself as the trustee, ensuring you have control over how the trust is handled when you’re alive.
How Does a Revocable Trust Work?
You create a revocable trust, which is a legal vehicle that can house certain types of assets. You then transfer assets into the trust. Once the assets are in the trust, they’re owned by the trust. Any income that comes from the trust is typically paid to you, and you can move assets in and out of the trust following approved procedures. When you pass away, the ownership of the assets held in the trust passes on to the beneficiaries of the trust via whatever method is dictated within the trust.
If you make yourself the initial trustee of a revocable trust, it’s typically important to name a successor trustee. This is the person who will take over managing the trust if you’re incapacitated or pass away. Note that when you pass away, any revocable trust you created automatically becomes an irrevocable trust. Whatever provisions were in place and whatever assets were owned by the trust are locked at that time, and the successor trustee can’t make changes to them.
What Is a Revocable Living Trust?
The terms revocable trust, revocable living trust, and living trust all mean the same thing. They all refer to a revocable trust that you can change within your lifetime.
Revocable Trust vs. Irrevocable Trust
Revocable and irrevocable are the two broad categories into which all types of trusts fall. The main difference between the two is that one is considered irrevocable, which means you can’t dissolve it. Although you can make some changes to an irrevocable trust, it’s not easy to do so. You must get the approval of all named beneficiaries and trustees or an order from the court.
Another major difference between revocable and irrevocable trusts is the type of shelter they provide for assets. While you transfer ownership of property or other assets into both types of trusts, the assets you transfer into an irrevocable trust are locked into the trust, and you have less control over them. However, they typically can’t be targeted by creditors, and you don’t pay the same type of personal income taxes on earnings that come from assets in an irrevocable trust.
Pros and Cons of a Revocable Trust
The type of trust that works for you depends on a variety of factors, including your estate planning and financial goals. Learning more about the pros and cons of revocable trusts can help you work with your financial advisor to make a choice that’s right for your situation.
Pro: Assets in the Trust Don’t Go Through Probate
When you transfer assets into the trust, the trust becomes the owner of those assets. It also includes provisions for passing the assets on to someone else if you pass away. This way, the assets in the trust don’t have to go through probate when you pass away.
For your heirs, one of the biggest benefits of avoiding probate is the ability to gain access to the assets faster. Probate can take months — or even years — if the estate is complex or the will is contested. In the meantime, your loved ones might be left dealing with a major financial loss, especially if you have dependents, such as a spouse or minor children. With a trust, any assets or income is immediately available to those loved ones when they need it most.
Con: Doesn’t Protect Assets from Creditors
Since you’re the owner of the trust and the trust is revocable, it doesn’t shelter assets from creditors while you’re alive. An irrevocable trust does provide a shelter for assets, which means creditors can’t go after those assets if you owe them money.
If a creditor wins a lawsuit against you, they can attempt to force you to close a revocable trust. At that point, the ownership of the assets reverts back to you, and creditors with court orders can force the sale of the assets or take them as compensation for the debt you owe.
Pro: Creates More Privacy Than Some Other Options
When you create a will, the contents of those documents become public records when they’re filed for probate purposes. That means anyone can find out what assets were left to your heirs.
However, the contents of a trust are not public record, making it possible to transfer assets to beneficiaries with greater confidentiality. This may be a matter of practicality to help protect young or vulnerable heirs from scams or other issues, but it can also be a preference for a family to allow heirs to go through a time of grief without their financial information being discovered by anyone.
Con: Doesn’t Offer the Same Tax Protections as Irrevocable Trusts
Living revocable trusts don’t create a tax shelter for your assets. You’ll still benefit from any income the assets in the trust generate, and you’ll have to report that income when you file your personal income tax returns.
Many people believe that any type of trust also provides a shield against estate taxes. This isn’t true; you still control the assets in a revocable trust, which means they may be included in the valuation of your estate upon your death to determine whether estate taxes are owed.
Pro: Provides Some Protections if You’re Incapacitated
One protection offered by a revocable trust is protection for your interests if you become incapacitated. If you name yourself as the initial trustee of the revocable trust, you must also name a successor trustee. This is the person you want to take over the trust when you pass away. It’s also the person who handles the trust if you become incapacitated due to illness or injury.
A trustee has a fiduciary responsibility toward the beneficiary of the trust. Fiduciary responsibility means the person must act in the interests of the beneficiary. That means the successor trustee who handles the trust in your absence must do so with your interests in mind and by following the rules and requirements you set out in the trust. Knowing this can provide some peace of mind that your assets will be managed according to your wishes, even if you can’t manage them.
Con: Can Require a Good Amount of Administrative Work
Of course, setting up and managing a revocable trust does take some work. Setting up a trust is a lot more work, for example, than simply writing a will and dictating how you want your assets distributed upon your death. When you move assets into a trust, you must re-title them, so they’re owned by the trust and not by you. You may need to sign new deeds, open new bank accounts, or otherwise delve into a lot of paperwork to appropriately fund a trust — and that doesn’t even count the paperwork of creating the trust to begin with.
Pro: Offers More Flexibility Than Irrevocable Trusts
Revocable trusts typically offer more flexibility than irrevocable trusts. You maintain ownership of the trust and can still access the assets if necessary. You can move assets in or out of the trust if you change your mind or have a need to, and you can add or remove beneficiaries.
For example, someone might create a revocable trust and make their three children the beneficiaries. But what if those children get married, another child comes along, or something else in the family dynamic changes? With a revocable trust, you can change the beneficiaries to match the dynamic of the family as needed.
Con: Creates Ongoing Costs for the Estate
In general, trusts are more expensive than wills to create. You may need to pay more upfront to have a trust created, and you may continue to pay some expenses for the management of the trust. However, this disadvantage is often offset by the time and money savings a trust can eventually create for you or your loved ones.
How Much Does a Revocable Trust Cost?
The average rate for an attorney to create a revocable trust is between $1,500 and $2,500, although you may find attorneys who charge less or more. You may also need to pay filing fees and cover other administrative expenses, although often, those costs are included in the attorney’s fees.
While you can create a revocable trust on your own using templates and other guides, this isn’t typically recommended. Trusts can be fairly complex legal vehicles, and making a mistake in creating one could lead to losses in the future.
Other Types of Trusts
While all trusts are revocable or irrevocable, they come in a wide variety of subtypes. Here are just a few types of trusts you might consider to meet your needs.
A testamentary trust is established following directions you put in your will. This type of trust isn’t created until you pass away, but you can use it to create conditions for the distribution of your assets. For example, you can dictate that minor children don’t get the assets until they reach an age of majority or make the distribution of the assets conditional on specific use — such as for educational purposes.
You can have instructions for multiple testamentary trusts in your will. However, testamentary trusts are not immediately established when you pass away. The will has to go through probate, and the trusts are created after the fact to hold the assets that are being distributed after the estate is settled.
A marital trust allows one spouse to pass assets and income to the other without the assets going through probate. This type of trust does protect the surviving spouse from estate taxes on those assets, but it only pushes the tax burden down the road. When the second spouse passes away, the assets may be taxed if the estate value is enough to meet estate tax thresholds.
Life Insurance Trusts
You can create an irrevocable trust that’s meant to hold only a life insurance policy. If you pass away, the benefits of the life insurance policy are paid into the trust. That money becomes an asset owned by the trust, and it can be managed and disbursed to beneficiaries following the rules of the trust.
You can create a few types of charitable trusts. The main purpose of all these options is to leave a philanthropic legacy by making a charity the beneficiary. You can also make multiple charities beneficiaries and have a trustee manage assets, so they’ll continue to receive ongoing support from you after you’re gone.
Trust to Support Specific Needs
You can set up a trust, or trust fund, to provide for a loved one with special needs. A trustee manages the assets and can pay bills, take care of expenses, or otherwise handle the finances associated with the trust, so a spouse, adult child, or another dependent with special needs is cared for.
Creating a revocable trust is just one of the ways you can protect your legacy and your loved ones. Whether this is the right option for you depends on factors ranging from your net worth to the needs of your family. You can take the first steps to getting started on your estate planning process with Personal Capital today. Check out our guide to legacy and estate planning to find out more.