A revocable trust is a flexible financial instrument that allows the grantor or originator to alter or cancel its provisions based on their wishes. During the life of the trust, any income earned is distributed to the grantor, and only after the grantor’s death does the property transfer to the beneficiaries of the trust.
A revocable trust provides flexibility and income to the living grantor or trustor, as its provisions can be modified. Upon the trustor’s passing, the estate is seamlessly transferred to the beneficiaries.
Key Takeaways
- Trusts enable individuals to assign a trustee to manage and distribute assets to beneficiaries after their death.
- Revocable trusts offer living grantors the ability to change instructions, remove assets, or terminate the trust.
- Irrevocable trusts, once formed, cannot be altered; assets placed within them remain untouchable.
- Revocable trusts help beneficiaries circumvent probate court and guardianship proceedings.
- Despite their benefits, revocable trusts incur upfront costs, require detailed steps to fund, and do not eliminate the need for a will.
How a Revocable Trust Works
A revocable trust is an essential part of estate planning, managing the assets of the grantor as they age. It can be amended or revoked as desired, and the property it holds is included in estate taxes. A trustee may be assigned to manage the assets within the trust and distribute them to beneficiaries. The trust is kept private and becomes irrevocable upon the grantor’s death.
The principal, managed by the trustee for the beneficiaries’ benefit, can change in value based on investment performance or trustee expenses. The collective assets comprise the trust fund, and the trust avoids probate since it does not ‘die’ like a will.
Often, grantors act as their own trustees within a revocable trust, which is why these trusts have been central to estate plans for decades.
Advantages and Disadvantages of a Revocable Trust
Advantages
- If the grantor experiences health issues, the chosen manager can take control of the principal.
- Real estate included in the trust can avoid ancillary probate across different states.
- Minors’ assets are held in trust instead of needing a court-appointed guardian.
- Allows controlled distribution if a beneficiary is deemed incapable of managing assets wisely.
- These trusts are easy to administer and are disregarded entities for income tax purposes.
Disadvantages
- Establishing a revocable trust is time-consuming and involves significant effort.
- Assets must be retitled in the trust’s name to avoid probate.
- Ongoing monitoring is necessary to ensure the trust meets its objectives.
- Costs for maintaining the trust are higher compared to other estate planning tools like wills.
- A revocable trust offers no tax advantages and does not protect against creditors during the grantor’s lifetime.
Revocable Trust Pros and Cons
Pros
- Flexible and revocable
- Can avoid probate
- Protects trustor if they become incapacitated
- Establishes privacy for assets
Cons
- No immediate tax benefits
- No creditor protection
- Potentially costly to establish and administer
What Is a Revocable Living Trust?
A living trust is set up during one’s lifetime and can be either revocable or irrevocable. Frequently used in estate planning to avoid probate court and disputes over estate assets, a revocable living trust doesn’t provide tax or creditor protections as an irrevocable trust does.
Which Is Better: A Revocable or Irrevocable Trust?
Revocable and irrevocable trusts serve different purposes and each excels in specific areas. Revocable trusts are ideal for estate planning alongside a will, retaining the trustor’s control over assets. Irrevocable trusts, unchangeable once established, offer tax benefits and creditor protection, making them suitable for transferring high-value assets that might incur gift or estate taxes in the future.
What Happens to a Revocable Trust When the Grantor Dies?
Upon the grantor’s death, a revocable trust becomes irrevocable.
Can You Get Deposit Insurance on a Trust Account?
Yes, as of April 1, 2024, the Federal Deposit Insurance Corporation (FDIC) regulations state that both revocable and irrevocable trust accounts are treated the same when determining insurance limits. Funds held in bank trust accounts are insured up to $250,000 per beneficiary per insured bank up to a maximum of $1.25 million, depending on the number of eligible beneficiaries.
The Bottom Line
Creating a revocable trust during your lifetime can help manage assets and offer protection if you become ill or disabled. Its flexibility allows for revocations and amendments as needed. Although it provides benefits like avoiding probate for heirs, it does not confer tax benefits.
Related Terms: Irrevocable Trust, Living Trust, Trustee, Beneficiary, Will, Estate.
References
- Federal Deposit Insurance Corporation. “New Trust Account Rule (April 2024) Deposit Insurance Seminar for Bankers”, Pages 6-8.
