What are revocable trusts?
Establishing a Last Will and Testament is a well-known method of passing your wealth and assets to your beneficiaries. However, revocable trusts empower grantors with more precision control over the distribution of their wealth after death or incapacity. More importantly, revocable trusts also provide beneficiaries the much-needed privacy for themselves by foregoing probate.
When properly planned, a revocable trust can prevent the costly, public, and often drawn-out court battles that usually take place upon the grantor’s death or incapacity.
It can let you provide for your spouse without the risk of alienating other heirs such as children, which is important if you have second marriages or past fling. It can save estate taxes and protect assets for children and grandchildren from courts, creditors, divorce, and even irresponsible spending.
What is the Definition of Revocable Trusts?
The legal term for the person responsible for creating the trust is ‘trustor’, ‘settlor’, and ‘grantor’.
A revocable trust is created during a grantor’s life. The grantor can change or cancel it whenever they wish – without having to give any reason. Once assets and funds are placed inside a trust, a third party (called a trustee) manages them. This person determines the control and distribution of wealth when the grantor dies – but this must be done in accordance with the wishes of the grantor.
What Revocable Trusts Do and Don’t Do
With the definition of revocable trusts out of the way, let’s explore a few things that this trust can and can’t do.
i) Ensures Privacy
This is the primary reason why people opt for revocable trusts – because it avoids the costly legal process of redistributing wealth when the grantor dies. A cursory look at typical probate processes shows that it includes extremely invasive processes that no family wants to deal with when they’re still grieving the loss of their loved one.
ii) Follows the Exact Outline of the Grantor
Revocable trusts share many similarities with wills by distributing assets of a grantor to their heirs after death. The revocable trust can be changed as many times as you want to. Upon death, the trustee you choose will make sure to follow the exact guidelines of the revocable trust document.
iii) Beneficiaries are protected from creditors
Depending on who you ask, this could be the single most valuable benefit of revocable trusts: they provide creditor protection for the heirs included in the trust – this only applies if the assets are transferred in the trust after the guarantor passes.
iv) Can Help with State Estate Taxes
This only applies to families that are living in states with estate tax, a properly drafted revocable trust can provide great value by minimizing state estate taxes.
v) Protects Minor Children
A revocable trust can hold the assets and money for minor children until they are responsible enough to manage it themselves. Many grantors prefer to give their children access to their assets over a period of time, i.e. at ages 20, 25, and 30.
i) Doesn’t Provide Tax Benefits
One of the biggest misconceptions about revocable trusts is that it can provide relief from estate tax. It does not have any bearing on estate tax or taxes during a grantor’s lifetime. The government views the assets inside a revocable trust with the same lens as it would if the grantor held them directly.
ii) Doesn’t Eliminate Estate Tax
Moving assets to a revocable trust does not constitute as a gift and does not have any bearing on estate tax limits, currently set at $11.58 million for individuals as of 2020.
Revocable Trusts vs. Irrevocable Trusts
This discussion wouldn’t be complete without going into the old ‘revocable trusts vs. irrevocable trusts’ debacle.
The legal definition of revocable trusts allows them to be very flexible. They have little to no limits during a grantor’s lifetime. In general, you can act as the trustee and retain complete control over the trusts’ assets. You can alter or outright cancel revocable trusts until the grantor’s death. After this point, they become irrevocable (meaning, you cannot alter or cancel them).
You can move wealth into or out of the trust by simply retitling them. Moving assets like this does not have any consequences on income or estate taxes. You can even redistribute the assets from the revocable trust to fund your lifestyle
This is in stark contrast with the rigidity of irrevocable trusts. The grantor no longer retains control over the assets they put into the trust.
You can consider them written in stone and you can only change them in extreme circumstances. Since irrevocable trusts remove all control from the grantor, they are exempt from estate tax after death, and they also relieve the benefactor of any tax responsibility for any wealth generated by the assets.
Irrevocable trusts are difficult to set up. An expert attorney should write an irrevocable trust.
Why is it Important to Fund My Revocable Trust?
If you set up your living trust but forgot to change titles, your family will have to go through probate. The revocable trust only controls the assets you directly put into it. You may have a great trust in place. However, until you transfer your assets to it by changing titles, it doesn’t control anything yet.
If you want your family to avoid probate, then you must fund the revocable trust now, while you still have the chance to do so.
What Will Happen if I Forget to Include an Asset
Your lawyer will prepare a ‘pour-over will’ that can include any assets you forgot and send it to the trust. The asset may go through probate first. However, after that, its distribution can be based on your instructions in the revocable trust.
Which Assets Should I put in My Revocable Trust
In general, most grantors prefer to include all their assets in their trust. Assets that you want to include in your trust include bank accounts, saving accounts, investments, business interests, notes payable to you, and real estate. You should also change any designations to your trust so that those assets can flow into your trust based on your outlines.