Estate planning can be a complicated business. You want to properly distribute your assets to your loved ones after your death. But what if something changes? You never know what the future holds and you don’t want to be legally bound to decisions you made in very different circumstances.
This is precisely why revocable trusts exist.
Read on to learn the ins and outs of creating a revocable trust.
Or, to learn about other types of trusts, you can explore our complete guide to trusts.
What is a Revocable Trust?
A revocable trust (also called a “living trust“) is a trust that you can change or even revoke at any time. This type of trust allows for more flexibility than an irrevocable trust, because it doesn’t require the approval of beneficiaries or court approval to be changed.
The trust is created by the grantor and is used to protect assets and distribute those assets after their death. Revocable trusts are usually managed by a trustee, who is appointed by the grantor. The trust document grants specific powers to the trustee and lays out what duties they must perform on behalf of beneficiaries.
The trust, trustee, beneficiaries, and assets within the trust can be changed at any time. Contrast this with an irrevocable trust, which cannot be changed once it is established without the express approval of the beneficiaries.
Advantages of Revocable Trust
Revocable trusts offer a variety of benefits to those who create them.
First, you can change the terms of the trust as needed without seeking the approval of beneficiaries or any other parties. This gives you significant amounts of flexibility and allows you to update the trust as circumstances change.
Another advantage is that the trust becomes effective as soon as the legal document is signed and funded. Compare this to a will, which only becomes effective upon your death. This benefit is particularly important as you grow older. If you become incapacitated, the trust allows you to maintain control of your assets and transfer them as needed.
Revocable trusts also allow you to distribute your assets with minimal interference from outside parties. Unlike a will, you don’t have an executor who would need to go through probate before distributing assets. Avoiding probate also gives you increased privacy.
You might also benefit from a revocable trust if you want to be prepared for certain situations such as divorce, incapacity, death, or tax issues without having to specify these details up front. You may not know what the future holds but at least you have flexibility if something unanticipated occurs.
Another advantage is that if any of the beneficiaries are minors, the trust can be used to protect the assets until they turn 18 and allow you to determine how the money will be distributed to them. If you are concerned they won’t use the money wisely, you can stipulate how much they are to receive within set periods of time.
Disadvantages of a Revocable Trust
There are some disadvantages with creating a revocable trust. With irrevocable trusts, you don’t receive the tax benefits that you do with an irrevocable trust. Assets within the trust are still subject to estate taxes upon your death, which reduces the assets available to the beneficiaries.
Additionally, creditors are able to make claims against assets within the trust to recoup debts owed by the grantor. If you have significant debts at the time of your death, those will be paid out of the trust before assets are distributed.
There is also the possibility that the trustee could mismanage the assets within the trust. The risks of a poorly-managed trust can be significant, as trustees are responsible for ensuring all tax and legal obligations imposed on trusts are met. Trustees should not only ensure they understand their responsibilities but also have sufficient resources to fulfill them effectively in order to avoid any potential problems with taxation or other regulatory agencies.
Who Should Create a Revocable Trust?
If you want to distribute assets to beneficiaries, know that the assets within the trust will be managed even if you can’t, and want the freedom to change things as necessary, you should consider creating a revocable trust. They give you the peace of mind that your assets will be properly managed and distributed without having to worry about future changes in circumstance.
For example, if you remarry and have children with your new spouse, you can change the terms of the trust to reflect your new family situation.
Revocable trusts are also helpful for beneficiaries who don’t want to be involved in the management of their parent’s assets. For example, children may not want to be responsible for managing their parents’ property or finances.
How Do You Create a Revocable Trust?
While the steps may vary slightly depending on your location, the basic steps are as follows.
First, establish what assets are going to be included in the trust. You can include almost anything that has value, including cash, property, investments, etc. Think through this carefully since any assets not in the trust will have to be designated in your will.
Second, specify who the beneficiaries are and what each individual will receive. Remember, you can change this if circumstances require it. You also need to specify if there are any conditions that must be met in order for a beneficiary to receive assets (such as turning 18).
Next, designate a trustee who will take care of those assets for you while you’re alive and execute your wishes after your death. This is an important decision that shouldn’t be made lightly. You want to choose a person or institution that has integrity and will manage your assets wisely. Before designating an individual, it’s wise to meet with them and ensure they understand all that being a trustee entails.
Finally, formalize your intentions in a written document. This document should specify how the trustee will use the assets in the trust during your lifetime and how they will be distributed after your death.
Because of the legal and tax implications of creating a revocable trust, it’s usually a good idea to establish the trust with the help of your lawyer or estate planner. This helps ensure that nothing slips through the cracks.
Is a Revocable Trust Right for You?
The point of a revocable trust is to provide you with the peace of mind that comes from knowing your assets are safe for your beneficiaries and the trust can be amended if necessary. They also provide privacy since your estate won’t have to go through probate.
If this checks all your boxes, then consider meeting with your lawyer to start the process of creating the trust.
