What is a Revocable Trust?

A revocable trust is like a check that hasn’t been cashed yet…

When you write someone a check, you could decide to rip it up instead of sending it. Even once you send it, you still have the opportunity to cancel payment on the check. Until they cash the check, you can always change your mind. Similarly, a revocable trust is one that allows you to change or throw out the provisions of the trust. And just like you can’t cancel the check once the recipient has cashed it, a revocable trust can’t be changed once the grantor dies.

A trust is a legal document that allows you to turn control of your assets over to another party. The person who establishes the trust is the trustor (aka grantor), and the person who will benefit from the trust is the beneficiary. The trustee is the person responsible for managing the trust — This can be the trustor or a third party.

When you establish a trust, you can set up specific guidelines as to how and when the beneficiary can receive the assets from the trust. The trustee manages the trust, though the recipient can still benefit from it without having full access to it.

Trusts are often used as an estate planning tool. Someone might use a trust instead of relying solely on a will, which could end up in probate and create a lengthy legal process before your loved ones can access your assets.

A revocable trust (aka a living trust) is one that allows you to change the provisions later on if you so choose. In the case of revocable trusts, the trustor is often also the trustee (the manager of the trust). They’re establishing the trust as a way to pass their assets (such as real estate, securities, and cash) along to their loved ones when they die.

The trustor typically sets up the trust and designates any beneficiaries. While they’re still alive, they’re able to change or undo any of the provisions of the trust. They can change the beneficiaries, change which beneficiaries will receive which assets, reclaim any of the assets, or even cancel the trust altogether.

When the trustor sets up the revocable trust, they usually name someone as a successor trustee who will manage the trust in their place if they die, or if they’re still alive but no longer able to oversee the assets in the trust.

Then, when the trustor dies, the revocable trust automatically becomes an irrevocable one, meaning the provisions are set in stone.

The successor trustee is responsible for handling any financial matters, such as filing taxes on behalf of the deceased, paying any remaining bills or debts, and managing the assets and investments of the trust. Then, the successor trustee distributes the assets left in the trust to the beneficiaries per the original trustee’s instructions.

With many trusts, a third-party trustee is the one who manages it. A grantor trust refers specifically to a situation where the person who created the trust is also the person to manage it.

There’s no legal separation between the grantor and the trust — They even have the same Social Security Number.

Because a grantor trust involves the grantor retaining control of the assets in the trust, they are also responsible for paying any taxes on them.

Suppose the assets in the trust include several stocks that earn dividends. Because the grantor has control of the assets in the trust, he or she has to pay income taxes on those dividends as if they were his or her own income.

A revocable trust is ideal for anyone with significant assets to pass along to their loved ones after their (the grantor’s) death.

The advantage of choosing a revocable trust is that the trust allows the successor trustee to take over control of the trust immediately. In the case of assets left in a will, individuals may have to go through probate first, which can be a lengthy and expensive process. With a revocable trust, you know your family is generally going to get your assets more quickly.

A revocable trust might also be the right choice for someone who has minor beneficiaries and wants to ensure they’ll receive some money when they’re older. Suppose that you have young children and want to set aside money for them to pay for college if you die before that time.

You can put the money into the trust with specific instructions for its use, and it will remain until they are ready to head off to college. With just a will, it can be more challenging to ensure that money goes to the purpose for which it was intended.

A revocable trust is one that allows the trustor to manage and make changes to the trust up until their death. But what about an irrevocable trust?

An irrevocable trust is one that does not allow the trustor to go back and make changes after they’ve created it. The trustor cannot go back and change provisions of the trust without the sign-off from each beneficiary. This rule could be problematic if you want to remove a beneficiary, as you’d have to get their permission to do so.

Given this information, it might seem that a revocable trust is an obvious choice. However, there are some upsides to choosing an irrevocable trust over a revocable one.

Because of the way a revocable trust works, the assets within it are always considered to be your assets. If creditors come after you or someone sues you, the assets in the trust could be up for grabs. Additionally, there could be estate taxes on those assets after you die, since you’re passing them onto your beneficiaries.

With an irrevocable trust, the assets in the trust are no longer yours. They’re legally separate from you, which protects them from anyone coming after your money. They also avoid estate taxes, since they aren’t technically a part of your estate anymore.

Irrevocable trusts have their advantages, but be very sure that one is the right choice for you before you jump in — Once you commit, there’s likely no going back. These decisions should be discussed with your estate planning attorney as there are many complex considerations.

Depending on your situation, a revocable trust can be a good way to plan your estate and ensure your assets can easily transfer to your loved ones when you die. A revocable trust has significant advantages, but some downsides as well.

Here are the advantages of a revocable trust:

• Avoid probate: When you use a revocable trust, you can save your loved ones the time and money associated with the probate process.
• Privacy: Unlike a will, which is a matter of public record, the contents of a revocable trust can remain private. This protects your privacy as well as that of your loved ones who receive your assets.
• Flexibility: One of the most significant advantages of choosing a revocable trust over another option, such as an irrevocable trust, is that you can go back any time and change the provisions. The assets are yours to control until you die.
• Faster distribution: When you use a trust, you have more control over your assets (and your loved ones will have more control over them if you die). As a result, they may be able to access distributions more quickly.

Here are the disadvantages to a revocable trust:

• No tax benefits: Unlike an irrevocable trust, a revocable one doesn’t have the tax advantages of avoiding estate taxes. The grantor must also continue to pay income taxes on any qualifying earnings generated by the trust.
• Retitling of assets: To put assets into the trust, you have to retitle them in the name of the trust, which can be complicated and time-consuming — This is the only way to avoid probate.
• Less protection: With an irrevocable trust, the money is protected from creditors and lawsuits. That’s not the case with a revocable trust.

To set up a revocable living trust, you can seek the advice of an attorney. You’ll typically need the following information to get it set up:

• The name of the trustor or grantor (the person setting up the trust)
• The name of the trustee (the person who will manage the trust — For revocable trusts, this is often the grantor
• The name of the successor trustee (the person who will manage the trust in your place if you die or become incapacitated)
• The names of the beneficiaries
• The assets to go into the trust
• Details on which assets go to which beneficiaries

Once the trust document is written, you usually will have to sign it in the presence of a notary. You’ll then have to transfer ownership of the assets into the trust, which an attorney can help you do.

*Additional disclosure: This article contains general estate planning concepts and not legal advice. Please consult with your attorney before entering into any legal agreements *