When a Revocable Trust Makes Sense

Everyone is familiar with a will and why it is essential to ensure their financial affairs are settled in accordance with their wishes. While having a will can bring some clarity to those assuming the responsibility for settling your estate, it can only go so far in actually executing your wishes, especially when they involve the ongoing management of assets until their distribution. This often places a burden on family members by forcing them to make decisions that may not be in there best interests. By adding a relatively inexpensive estate planning tool, called a revocable trust, to your will you can provide absolute clarity while ensuring your assets are optimized for the benefit of your family.

What Is a Revocable Trust?

Also referred to as a living trust or inter-vivos trust, a revocable trust is an estate planning tool that allows you to have your property transferred to and managed by a trust during your lifetime. It is revocable, which means it can be changed at any time while you are living. The trust becomes irrevocable after your death, requiring that all of its provisions be carried out by a trustee who is designated by you. (For more, see: 6 Estate Planning Must-Haves.)

With a properly drafted and funded living trust you can:

  • Avoid cost and delays of probate on your assets: A revocable trust is funded with the assets you place in the trust. The trust then becomes the owner of the assets, which are passed by beneficiary designation directly to your family members.
  • Prevent  your financial affairs from becoming public record: Because your trust assets avoid probate, there will be no public record of their transfer. A will is matter of public record but a trust is not.
  • Control what happens to your assets after you are gone: Your trust includes specific instructions on how your assets are to be managed. This is important if your intent is to maintain the continuity of income from a business or an asset.
  • Plan for the possibility of your own incapacity: Should you ever be unable to perform the duties as trustees due to physical or mental incapacitation, your trust will have designated successor trustees who can step in.

Creating a Revocable Trust

A revocable trust is fairly easy to set up. Although there are many DIY legal websites where you can create one online, it would be best to use an attorney to draft and authenticate the trust. It’s a legal document that specifies the grantor’s (you and/or your spouse) terms, names a trustee and the beneficiaries, lists the trust’s assets and the way in which they are to be managed and distributed. Once the grantor and the trustee sign the document, the title of the named assets and property can be assigned to the trust.

A revocable trust is referred to as a living trust because it can be changed or revoked by the grantors during their lifetimes. The trust can be updated for any changes in marital status or family relationships and assets and properties can be added or removed. Trustee designations can also be changed. This is why your revocable trust should be reviewed periodically because once the grantors die, it becomes irrevocable. (Read more, here: Estate Planning: Estate Planning Basics.)

Selecting a Trustee

A trustee is a person or entity you select to manage your final affairs as part of your estate plan. A trustee can be an individual, typically you and/or your spouse (while you are alive), a family member or friend who is familiar with your affairs.

Or it can be corporate trustee, who is a dedicated professional with expertise and experience in managing trusts in exchange for a fee. Corporate trustees are more costly, but they have the advantage of being knowledgeable in issues of taxation, administration, financial planning and investment management. They are also impartial, which can help when family tensions arise. Your financial advisor may be best positioned to evaluate your needs and circumstances to help you decide whom you should select as your trustee.

You Still Need a Will

A revocable trust is the vehicle for distributing your property to your heirs. However, you still need a will to execute the trust. The trust is the primary beneficiary of your will. The added benefit of having a will is that for any property or assets that might have been excluded from the trust, the will acts as a “catch all” to ensure that all property is distributed according to your wishes.

In addition, if you need to designate a guardian for dependent children or relatives you need a will, because there is no place in a trust to establish guardianship

Is a Will or Trust Best for Your Needs?

For many Americans, a will may be sufficient for settling their financial affairs. Most states have a streamlined process for probating estates under a certain dollar threshold (the threshold varies from state to state). However, if you have assets and property and want to include special provisions for their management or distribution, you should have a revocable trust. For instance, a trust enables you to establish provisions detailing when children may be able to receive trust assets. You may want to be able to limit the control some heirs have over certain assets. In general a revocable trust enables you to achieve objectives that a will cannot. (For more from this author, see: Why You Need to Update Retirement Plan Beneficiaries.)