Often, when people hear the term “revocable trust,” they dismiss it as rich-people business. “That’s a terrible mistake,” says estate-planning attorney Martin Shenkman. “The average person can use these trusts, and in fact, needs them as much as wealthy people.”
We asked Shenkman to explain the ins and outs of this estate-planning tool, including revocable trust benefits, what revocable trusts do and don’t do, and how to incorporate a revocable trust into a plan that meets all your needs.
What Is a Revocable Trust?
“A trust is a contract between parties,” Shenkman says. With a revocable trust (sometimes called a revocable living trust or living trust), a single person plays all three roles of trustor, trustee, and beneficiary, at least while they’re still living and not disabled.
To illustrate what that looks like in practice, let’s compare with an example of a standard irrevocable trust:
Mom establishes a trust to protect Suzie’s inheritance and names Uncle Joe as the trustee to manage the assets. In that arrangement, Mom created the trust, so she is known as the settlor, trustor, or grantor.
As the person who watches over the trust, Uncle Joe is known as the trustee. And as the person who will benefit from the trust, Suzie is the beneficiary.
Now, let’s modify that example with a revocable trust: Mom establishes the trust (trustor), manages the trust (trustee), and enjoys the assets contained in the trust while she is living (beneficiary).
The trust contains instructions for what will happen when Mom is incapacitated or dies, including the naming of successor beneficiaries (Suzie) and a successor trustee (Uncle Joe). The trust is “revocable” in that Mom can amend or revoke it any time before her death.
Key Benefits of a Revocable Trust
Avoiding probate
“The pitch often made for revocable trusts is that by creating one, now you avoid probate,” Shenkman says. Probate is the legal process whereby the state certifies the authority of an estate’s executor. It can be costly and time-consuming and is a matter of public record. For many people, when creating a revocable trust, avoiding probate is top of mind.
Unfortunately, Shenkman says, while having a revocable trust can help keep an estate out of probate, it will not do so if the family doesn’t get along and there’s a legal dispute about inheritances.
A revocable trust may also fail to keep the estate out of probate if the assets are titled incorrectly. If assets are titled as joint accounts or as pay-on-death or transfer-on-death, they may avoid probate, but they will also avoid all the planning in the revocable trust (e.g., trusts for heirs).
Managing assets during incapacity
Additionally, a revocable trust makes it easier to manage assets if the grantor becomes incapacitated. The trust can stipulate that if you become unable to handle your own affairs, your designated successor trustee can take over without having to wait for a new court proceeding or probate.
What a Revocable Trust Does Not Do
A revocable trust does not avoid taxes
“Revocable trusts, in and of themselves, do not avoid tax,” Shenkman says. The trust’s income is generally still taxable to the grantor, and because the assets remain part of the grantor’s estate, the trust generally doesn’t reduce estate taxes, either.
However, a revocable trust can be drafted with provisions that allow married couples to take advantage of estate-tax planning after the first spouse dies.
A revocable trust does not protect your assets from creditors
Some people believe that a revocable trust will shield assets from creditors. That’s only partially true, Shenkman says. “Generally, to protect assets, you need an irrevocable trust or an entity like a limited liability company, or both.”
That pertains to the grantor while still living…but, says Shenkman, “Revocable trusts are very valuable for protecting assets for the people who inherit the wealth if bequests are in further trust.”
A revocable trust does not work unless it’s properly funded
A revocable trust does not work unless assets are actually transferred into it or unless there’s a “pour-over will” that will automatically transfer remaining assets into the trust upon the death of the grantor. Having assets in the trust during your lifetime will better protect you if you become disabled, because your successor trustee can quickly use those assets to help manage your affairs.
Revocable Trust vs. Will
Both a revocable trust and a last will and testament can specify who receives your assets after you die, but they work differently.
A will takes effect only when you die, and it generally requires probate to transfer the assets that were held in your name. But a revocable trust takes effect during your lifetime and should automatically pass assets on your death without probate.
You transfer ownership of assets to the trust, remain in control as trustee, and name a successor trustee to manage and distribute assets after you die.
A will may be all you need if your estate is straightforward and you’re comfortable with probate. One thing a will does that a trust cannot is to name a guardian for minor children.
When Might a Revocable Trust Make Sense?
People might be particularly interested in a revocable trust if:
- They’re concerned about privacy
- They’re worried they’ll lose a significant portion of the estate’s value to probate fees
- They own property in multiple states
- They want protection against possibly becoming incapacitated
In fact, when it comes to choosing a revocable trust, incapacity is often a primary motivator.
Do You Need a Lawyer to Set One Up?
Ideally, everyone should hire an experienced estate-planning attorney to set up their trust. But we live in the real world. “Not everyone feels they can afford that,” Shenkman says.
You can do your planning using online tools or a non-specialist attorney. But it’s important to draft the document carefully and perhaps run it by an attorney after it’s written.
But writing skill is not the key asset that an attorney brings, says Shenkman. “The most important thing a lawyer does that you can’t do for yourself is to be objective. If you’re going to do this online, get a trusted friend or relative to help you, someone who’ll say, ‘What are you talking about? Your kids don’t get along.’ That way, you’ll make a plan that really works for your situation.”
Toward a Better Revocable Trust
A revocable trust will only accomplish what you want it to if you think not in terms of a “revocable trust” but a “revocable trust plan.”
Instead of simply checking the box that says you’ve created a revocable trust, think about your entire situation:
- Do you have assets titled jointly that may be reached by a surviving spouse’s remarriage?
- Are your assets scattered in 10 different bank accounts?
- Do you have successor beneficiaries who are going to fight over money?
- Do you have children who are already heavily financially dependent on you who will struggle after you die?
- Does your successor trustee know how to keep paying your bills if you become incapacitated?
- Have you named a revocable trust successor trustee who can truly be counted on, or should you also name a “trust protector” who can remove or replace a trustee who proves to be a bad actor?
Paying attention to these things is crucial to the creation of a revocable trust that truly serves your needs. “It supercharges a typical revocable trust to be a very powerful tool to protect people from disability and advancing age,” Shenkman says. “Having this in place before you need it is really important.”
