What Is a Revocable Trust?
A revocable trust is a trust whereby provisions can be altered or canceled depending on the wishes of the grantor or the originator of the trust. During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the beneficiaries of the trust.
A revocable trust is helpful since it provides flexibility and income to the living grantor (also called the trustor). Provisions of the trust can be changed, and the estate will be transferred to the beneficiaries upon the trustor's death.
- Trusts are created by individuals assigning a trustee to manage and distribute the assets to the beneficiaries after the owner's death.
- Revocable trusts let the living grantor change instructions, remove assets, or terminate the trust.
- Irrevocable trusts cannot be changed; assets placed inside them cannot be removed by anyone for any reason.
- Revocable trusts allow beneficiaries to avoid probate court and guardianship or conservatorship proceedings.
- However, revocable trusts have upfront costs, involve many steps to fund, and don't exempt the owner from needing a will.
How a Revocable Trust Works
A revocable trust is a part of estate planning that manages the assets of the grantor as the owner ages. The trust can be amended or revoked as the grantor desires and the property it holds is included in estate taxes. Depending on the trust’s directions, a trustee might be assigned to manage the assets or property within the trust. The trustee is also charged with distributing the assets to the beneficiaries. The trust remains private and becomes irrevocable upon the grantor’s death.
The money or property held by the trustee for the benefit of someone else is called the principal of the trust. The value of the principal can change due to the trustee’s expenses or the investment’s appreciation or depreciation in the financial markets. The collective assets comprise the trust fund. The person or people benefiting from the trust are the beneficiaries. Because a revocable trust holds the assets and it doesn't die, the trust avoids probate, which is the legal process of distributing assets of a will.
The grantor often acts as the trustee of a revocable trust. This is quite unlike an irrevocable trust. These trusts have been the centerpieces of most estate plans for decades.
All trusts are either revocable (i.e., living trusts, that can be changed by the grantor if need be), or irrevocable (fixed trusts that cannot be changed once established).
Advantages and Disadvantages of a Revocable Trust
There are several advantages of establishing a revocable trust. If the grantor experiences health concerns through the aging process, a revocable trust allows the grantor’s chosen manager to take control of the principal. If the grantor owns real estate outside the state of the grantor's domicile and the real estate is included in the trust, the ancillary probate of the real estate is avoided.
If a beneficiary is not of legal age and cannot hold property, the minor’s assets are held in the trust rather than having the court appoint a guardian. If the grantor believes a beneficiary will not use the assets wisely, the trust allows a set amount of money to be distributed on a regular basis.
Administration of these trusts is quite easy. They're disregarded entities for income tax purposes, meaning that any assets in the trust carry through to their grantors during their lifetimes.
There are some disadvantages to revocable trusts. 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 the trust’s objectives are being met.
Costs of maintaining a revocable trust are greater than other estate planning tools such as a will. A revocable trust does not offer the grantor tax advantages. It's possible that not all assets will be included in the revocable trust, so the grantor must create a will to designate beneficiaries for the remaining assets, to avoid probate. During the grantor’s lifetime, creditors can still reach the property in a revocable trust.
Revocable Trust Pros and Cons
Flexible and revocable
Can avoid probate
Protection of trustor becomes incapacitated
Establishes privacy for assets
No immediate tax advantages
No creditor protection
Can be expensive to establish and administer
What Is a Revocable Living Trust?
A living trust is one established during one's lifetime and can be either revocable or irrevocable. A revocable living trust is often used in estate planning to avoid probate court and fights over the assets of an estate, Unlike an irrevocable trust, the revocable living trust does not confer tax or creditor protection.
Which Is Better: A Revocable or Irrevocable Trust?
Revocable and Irrevocable trusts are intended to be used for different purposes, and therefore each is best suited for those purposes. Revocable trusts are best for estate planning in conjunction with a will, where the assets remain under the control of the trustor. An irrevocable trust cannot be changed or altered once established, and the trust itself becomes a legal entity that owns the assets put inside of it. Because the trustor no longer controls those assets, there are certain tax advantages and creditor protections. These are best used for transferring high-value assets that could cause gift or estate tax issues in the future.
What Happens to a Revocable Trust When the Grantor Dies?
When the grantor (trustor) of a revocable trust dies, the trust automatically converts into an irrevocable trust.