When it comes to estate planning, there are plenty of important things to consider. While it’s always important to have a will, there are other methods to pass down your accumulated wealth to your heirs. One of those methods is via a trust. You may think that trusts are only for the extremely wealthy. After all, the phrase “trust fund baby” isn’t exactly something used to describe your average working class Joe. However, you don’t actually need to be extraordinarily rich to form a trust. Even a modest amount of accumulated assets can be worth it. One particular form is a revocable trust. In this article, we’ll discuss everything you need to know about this particular part of estate planning.
What is a Revocable Trust?
A trust is an arrangement where one person (known as a “grantor” or “trustee”) holds money, property and other assets for another person or group of people (known as “beneficiaries”). A revocable trust is one where any provisions can be changed or even canceled, at any time. The total assets of the trust only pass to the beneficiary after the grantor’s death. In simple terms, a revocable trust is one that is flexible. It can be changed or canceled. Irrevocable trusts are more rigid. They have set parameters and guidelines that cannot usually be changed.
Revocable trusts are popular because they provide flexibility. They are often also set up to provide income to the living grantor (also called a “trustor”). As situations change, it can be extremely helpful to be able to alter the trust at any time. Perhaps some assets need to be added or removed from it. Once the grantor has died, revocable trusts typically become irrevocable and can no longer be changed.
Details of Revocable Trusts
Revocable trusts are commonly used in estate planning. They are created by individuals in order to manage and protect their assets as they age. The trust can be amended or revoked as the grantor desires. The assets are also subject to estate taxes. Depending on the trust’s directions, a trustee might be assigned to manage the assets within it. A trustee can also be tasked with distributing the assets — before and/or after the grantor’s death. Revocable trusts typically remain private and only become irrevocable upon the death of the grantor.
The assets held by the trustee for the benefit of someone else is called the “principal” of the trust. The value of a trust can change over time due to the trustee’s expenses. The appreciation or depreciation of the assets can also impact the trust’s overall value. The combined assets comprise what is known as the “trust fund.” Since a revocable trust lists one or more beneficiaries, the trust can help avoid probate. Many people opt to use a trust to distribute their assets, since it can help avoid family fights or legal disputes over a will.
All trusts are designated as being either “revocable–living trusts” or “irrevocable—fixed trusts.” As the names imply, the former can be altered, but the latter type cannot.
Pros of Revocable Trusts
Establishing a revocable trust has several advantages. As mentioned, they are often used to avoid family fighting over inherited assets. Another big advantage of revocable trusts is their privacy. A trust does not need to go through probate court, nor is it part of the public record. For families who value privacy, this means no one else will know which assets are being distributed — or who the beneficiaries might be.
The flexibility of a revocable trust is another major plus. For example, if the grantor experiences health problems as they age, they can name a trustee to manage the assets as directed. Revocable trusts can also be great for real estate holdings. If the grantor owns real estate outside the state where they primarily reside, that asset can be included in the trust. The probate of that real estate will be avoided upon their death.
Other benefits include adding beneficiaries who might be minors at the time of a grantor’s death. Should a trust beneficiary not be of legal age, the minor’s assets can be held in the trust. This may be a better option than having the courts appoint a guardian for the assets.
Additionally, if the grantor believes a beneficiary will not use the assets in a prudent manner, the grantor can add controls. For example, perhaps a quarterly or annual “allowance” will be paid instead of a single lump sum. This can help prevent irresponsible or carefree heirs from blowing their money quickly and frivolously.
Cons of Revocable Trusts
Revocable trusts also have a few disadvantages we should talk about. For starters, they can take a lot of time, effort, and costs to establish. Often, assets might be retitled in the name of the trust to avoid probate. The grantor’s entire estate plan must be monitored annual, to ensure the trust’s objectives are being met. These extra legal steps increase the cost of maintaining a revocable trust. At least, compared to some other forms of estate planning. Setting up your assets in a revocable trust also doesn’t mean you can skip writing a formal will. So the legal costs of going this route will be higher.
A revocable trust does not offer the grantor many tax advantages. Just because an asset doesn’t go through probate, that doesn’t mean it completely avoids estate taxes. Assets held in a trust are included in the taxable estate. That means they are subject to estate taxes.
Finally, revocable trust assets aren’t exactly shielded. Any creditors of the grantor can potentially tap into the assets in order to settle debts. If an estate ends up badly mismanaged, this could be a major problem.
The Bottom Line
Revocable trusts are designed to provide a measure of control. Grantors can oversee their assets and determine how they will be distributed. Trusts also provide privacy, since they are not subject to probate court or made public. They can also help to avoid family infighting over the estate of a deceased loved one.
However, revocable trusts don’t offer any significant tax advantages over a more traditional last will and testament. Trusts are still subject to estate taxes and creditors can seek payment from the assets held in them. Is a revocable trust the right move for you and your family? That depends on the overall value of your estate and your family situation. You should contact a professional estate planner to learn more about your options.