A revocable trust is a flexible way to plan your estate because the grantor can change or cancel its terms at any time during their lifetime. If the grantor dies, the trust will avoid probate.
Have you ever thought about what will happen to your property when you die and can’t take care of it anymore? Maybe you’re worried about your family’s future or just want to avoid the difficult probate process after you die. You might find the answer in a revocable living trust, but what does it really mean?
What Is a Revocable Living Trust?
There is a legal document called a revocable living trust that lets someone, including you, decide what to do with your money and property that is held in the trust. One way to plan your estate that is flexible is to separate ownership of your property from control of your property. You can still have control while you are alive.
The term “revocable” means exactly what it sounds like – you can change it or dissolve (“revoke”) it at any time while you’re alive The “living” part means you create it during your lifetime, not through your will after you die.
In simple terms:
- The trust holds your property
- You control it while you’re alive
- Your chosen trustee manages or distributes it after your death
How Does a Revocable Trust Work?
When you set up a revocable trust, there are three main roles involved:
- The Grantor (that’s you!) – the person who creates the trust and puts assets into it
- The Trustee – the person who manages the trust assets (often you initially)
- The Beneficiaries – those who receive benefits from the trust
Most people serve in all three roles when their trust is first created. You create it (grantor) you control it (trustee) and you benefit from it (beneficiary). After your death, the trust will have a new trustee and new beneficiaries – all determined by you when you set up the trust.
When you create the trust, you transfer ownership of assets (like bank accounts, investments, or real estate) into it Although the trust technically becomes the legal owner, you still maintain complete control You can buy, sell, or use the property just as before.
What’s the Purpose of a Revocable Living Trust?
People create revocable living trusts for several important reasons:
- Avoid Probate – Assets in a trust skip the probate process, which can be lengthy, expensive, and public
- Maintain Privacy – Unlike a will which becomes public record, a trust generally remains private
- Plan for Incapacity – If you become unable to manage your affairs due to illness or injury, your chosen successor trustee can step in
- Simplify Property Management – Particularly useful if you own property in multiple states (avoids probate in each state)
For example, if you own a house in California and a vacation home in Florida, putting both properties in a trust means your family won’t have to go through probate in both states when you die.
Who’s Involved in a Revocable Living Trust?
Let’s break down the key players in more detail:
- The Grantor/Settlor/Trustor – This is you, the person creating the trust
- The Trustee – The person who makes decisions about trust assets
- You’ll typically name yourself initially
- A successor trustee takes over when you can’t manage it anymore
- Can be an individual or financial institution
- The Beneficiaries – Those who receive money or property from the trust
- You’re usually the primary beneficiary while alive
- You name residuary beneficiaries who receive assets after your death
Revocable vs. Irrevocable Trusts: What’s the Difference?
Understanding the difference between revocable and irrevocable trusts is important for deciding which is right for you:
| Revocable Trust | Irrevocable Trust |
|---|---|
| Can be changed or canceled anytime | Nearly impossible to change once created |
| You maintain control of assets | You give up control to the trustee |
| Assets can be reached by creditors | Better protection from creditors |
| Assets count for Medicaid eligibility | May help qualify for Medicaid |
| No estate tax benefits | May reduce estate taxes |
| No separate tax reporting while alive | May require separate tax returns |
| Simpler to create and maintain | More complex to set up |
Benefits of a Revocable Trust
There are several key advantages to setting up a revocable trust:
- Avoiding probate – Assets in the trust skip the court-supervised process
- Estate planning flexibility – You can update beneficiaries or terms as circumstances change
- Incapacity planning – Your successor trustee can manage affairs if you become ill
- Privacy – Trust details aren’t public record like a will
- Simplifies real estate ownership – Especially helpful for property in multiple states
- Tax simplicity – No separate tax returns required during your lifetime
Drawbacks of a Revocable Trust
Nothing’s perfect, and revocable trusts do have some limitations:
- No creditor protection – Assets are still vulnerable to creditors’ claims
- No Medicaid protection – Trust assets count toward resource limits for eligibility
- No estate tax benefits – Trust assets are still part of your taxable estate
- Setup costs – Creating a trust may cost more than a simple will
- Requires maintenance – Assets must be properly transferred into the trust (called “funding”)
As Mike in Colorado discovered: “I set up my revocable trust last year, but forgot to transfer my new investment account into it. My attorney reminded me that any assets not in the trust would still go through probate – exactly what I was trying to avoid!”
How to Set Up a Revocable Trust
Creating a revocable trust involves these general steps:
- Consult an estate planning attorney to draft the trust document
- Choose a trustee (yourself initially, with successor trustees)
- Retitle assets into the trust (bank accounts, investments, real estate deeds)
- Name beneficiaries who will receive assets after your death
- Maintain and update the trust as circumstances change
One of the most common mistakes is failing to properly fund the trust. Without transferring assets into it, the trust provides little benefit.
Is a Revocable Trust Right for You?
A revocable trust might be right for you if:
- You want to avoid probate
- You own property in multiple states
- You’re concerned about privacy
- You want to plan for potential incapacity
- You want flexibility to change your mind
However, if asset protection from creditors or Medicaid planning is your primary concern, an irrevocable trust might be more appropriate.
Real People, Real Examples
Sarah and Mark decided to create a revocable trust after watching their neighbor’s family struggle with probate for almost a year. “We didn’t want our kids to deal with that hassle and expense,” Sarah said. “Plus, we liked that we could still use and control our assets, unlike with an irrevocable trust.”
Meanwhile, John, a retired doctor with significant assets, opted for an irrevocable trust. “Even though I gave up some control, the asset protection and tax benefits were more important for my situation,” he explained.
Common Questions About Revocable Trusts
Does a revocable trust protect assets from creditors?No. Creditors can still make claims against the assets as long as you own them.
Do I need to file a separate tax return for a revocable trust?
No. The trust’s income is reported on your personal tax return while you’re alive.
What does the property in a revocable trust belong to? The trust legally owns the property, but you still have control over it and can use it as before.
What happens to a revocable trust when I die?
When you die, the trust becomes irrevocable. Your successor trustee distributes assets according to your instructions without going through probate.
Do I still need a will if I have a revocable trust?
Yes. A “pour-over” will is recommended to catch any assets that weren’t placed in the trust.
Final Thoughts
A revocable living trust is a flexible estate planning tool that helps manage your property during your lifetime and ensures a smooth transition of assets after your death. While it doesn’t provide asset protection or tax benefits, it offers privacy, probate avoidance, and incapacity planning.
If you’re thinking about creating a revocable trust, consider consulting with an estate planning attorney who can guide you through the process and ensure your trust meets your specific needs and goals. Remember, the best estate plan is one that’s tailored to your unique situation, not a one-size-fits-all approach.
Have questions about whether a revocable trust is right for your situation? Let’s talk about your specific needs and goals. A personalized approach is always best when it comes to protecting your legacy and caring for the ones you love.
Which Is Better: A Revocable Trust or an Irrevocable Trust?
Revocable and Irrevocable trusts are used for different purposes. A revocable trust can be broken up by the person who set it up if they no longer need it. An irrevocable trust cant be changed or altered once its established. The trust becomes a legal entity that owns the assets it holds.
The trustor no longer controls or owns these assets so there are certain tax advantages and creditor protections. It is best to use irrevocable trusts when giving away valuable items that might cause gift or estate tax problems in the future.
Advantages and Disadvantages of a Revocable Trust
There are several advantages of establishing a revocable trust. It can allow the grantor’s chosen successor to step in and take control of the principal if the grantor experiences health concerns through the aging process.
Ancillary probate of real estate that the trust holds is avoided if the grantor owns real estate outside the state of the grantors domicile and the real estate is included in the trust.
A minor beneficiary’s assets can be held in the trust rather than having the court appoint a guardian if the beneficiary isnt of legal age and cant yet hold property. The trust allows a set amount of money to be distributed regularly and incrementally if the grantor believes a beneficiary wont use the assets wisely.
Administration of these trusts is quite easy. Theyre disregarded entities for income tax purposes. Taxes deriving from any assets held in the trust are assigned to their grantors during their lifetimes.
There are some disadvantages to revocable trusts, too, however. Implementing a revocable trust involves much time and effort. Assets must be retitled in the name of the trust to avoid probate. The grantor’s entire estate plan must be monitored annually to ensure that the trust’s objectives are being met.
The costs of maintaining a revocable trust are greater than other estate planning tools. A revocable trust doesnt offer the grantor any estate tax advantages. There is a chance that a grantor’s revocable trust will not include all of their assets. If this is the case, the grantor would also need to make a will to name beneficiaries for the remaining assets, which would then have to go through the probate process. Creditors can still reach the property in a revocable trust during the grantors lifetime.