A revocable trust is a popular estate planning tool that allows you to transfer assets into a trust during your lifetime. The key feature of a revocable trust is that you maintain control – you can modify the trust terms, add or remove assets, or even terminate the trust completely if your circumstances change.
But what exactly is a revocable trust, how does it work, and is it the right option for your estate plan? Here’s what you need to know:
What is a Revocable Trust?
A revocable trust, also called a revocable living trust or inter vivos trust, is a legal document created during your lifetime where you transfer ownership of assets to be held and managed by the trust.
As the creator of the trust, you are called the grantor or settlor. You designate a trustee to manage the assets in the trust – often, you name yourself as trustee initially. The trust document specifies beneficiaries who will receive distributions from the trust in the future.
The key defining feature of a revocable trust is that you, as the trust creator, can change or terminate it at any time. You maintain full control over the trust and trust assets during your lifetime.
A revocable trust only becomes irrevocable upon your death or if you become incapacitated. At that point, the successor trustee takes over the management of the trust, and the trust assets are transferred to the beneficiaries according to your instructions.
How Does a Revocable Trust Work?
To set up a revocable trust, you work with an estate planning attorney to draft the trust document. You name yourself as grantor and trustee and designate successor trustees in case you can no longer serve.
The trust document outlines how the assets are to be managed and distributed. You also name beneficiaries – the recipients who will inherit assets from the trust.
Next, you fund the trust by retitling assets like bank accounts, investments, real estate, etc., into the name of the trust. The assets belong to the trust, but you still control them as a trustee.
During your lifetime, you continue managing the assets as a trustee. You file taxes as normal and can remove assets from the trust at any time.
Upon your death or incapacity, the successor trustee takes over. They manage the trust assets for beneficiaries or distribute assets outright following the terms you outlined.
Because the assets are passed via the trust, probate is avoided. The trust remains private, while a will filed in probate becomes a public record.
Key Benefits of a Revocable Living Trust
- Avoid Probate – Assets transferred through a revocable trust pass directly to beneficiaries and avoid the court-supervised probate process. This can save time and expenses.
- Privacy – Trusts are not public records like wills filed in probate court. The terms and assets remain private.
- Control with Flexibility – As a grantor, you control the assets in the trust and can modify terms, add/remove assets, or terminate the trust at any time.
- Incapacity Planning – If you become incapacitated, your successor trustee can immediately step in and manage assets on your behalf using the terms you pre-arranged.
- Potential Tax Benefits – Depending on your assets and beneficiaries, trusts may provide some tax advantages over transferring assets through a will.
- Protection from Creditors – Assets in a revocable trust may offer additional protection from creditors over assets owned individually.
What Are the Disadvantages of a Revocable Trust?
While revocable trusts offer many benefits, there are some potential drawbacks to consider as well:
- Cost – Creating and funding a trust may cost more initially than simply drafting a will. You may need to pay an attorney to draft the trust and transfer assets into the trust through new deeds/titles.
- Complexity – Funding the trust and managing assets under the trust can be more complicated than simply owning them outright. Extensive record-keeping is key.
- No Court Supervision – Unlike wills probated in court, trusts have no court oversight. It is the successor trustee’s fiduciary responsibility to administer the trust correctly and in the beneficiaries’ best interests.
- Lack of Asset Protection – Unlike in an irrevocable trust, assets in revocable trusts are not shielded from creditors.
- Not a Substitute for a Will – You still need a will to transfer any assets left out of the trust upon death. The will and trust should work together as part of an integrated estate plan.
Revocable vs. Irrevocable Trusts
The key difference between revocable and irrevocable trusts lies in flexibility:
Revocable Trusts
- Can be modified or terminated at any time
- You maintain control as trustee
- Assets not protected from creditors
- No tax benefits
Irrevocable Trusts
- Cannot be changed once created
- Trustee manages assets for beneficiaries
- Assets protected from creditors
- Offers tax advantages
Irrevocable trusts, like reducing estate taxes, are often used for tax planning purposes and offer greater asset protection. But you lose control over the assets, and no changes can be made.
Revocable trusts are the much more common type used in most estate plans today. They provide probate avoidance and other benefits while maintaining your control up until death or incapacity.
Revocable Trust vs. Will: Which Do You Need?
Both wills and revocable living trusts allow you to leave instructions for transferring your assets upon death. But they accomplish this in different ways:
With a revocable trust, your assets transfer privately to heirs upon death without court probate. These legal documents are more difficult to contest than a will. However, they cost more upfront to create and fund.
A will, on the other hand, transfers assets publicly through probate proceedings. These documents are cheaper and easier to create than trusts but are contested much more frequently.
Many estate plans incorporate a revocable living trust as the primary document for distributing assets and a “pour-over will” covering any leftovers not transferred to the trust.
Using both together results in probate avoidance for most assets, privacy, and control through the trust, as well as the legal validity of a will backed by court oversight if needed.
Who Needs a Revocable Living Trust?
If you have significant assets or real estate, want to avoid probate, or need incapacity planning, a revocable trust can benefit your estate plan. Revocable trusts are especially useful for:
- Those with real estate holdings in multiple states (avoids multiple probates).
- Blended families and those with complex asset distribution goals.
- Those concerned about privacy, medical information becoming public in probate, or elder financial abuse risks.
- Individuals who frequently move between states or spend long periods away from their home state.
- Anyone who becomes disabled or incapacitated and needs a plan for asset management if unable to manage their own finances.
Is a Revocable Trust Right for You?
As you can see, revocable trusts offer numerous benefits for estate planning purposes. But determining if it’s the right option depends on your specific goals, family situation, asset types, tax considerations, and more.
An estate planning lawyer can help analyze your needs, discuss pros and cons of various options, and determine if a revocable trust is your best approach. Costs to create a trust may start around $2,000 or more, depending on the complexity of your assets.
Through careful planning, a revocable living trust can provide control, flexibility, and peace of mind. You can create the best estate plan for your loved ones and the protection of your assets by making well-informed decisions with professional guidance.
Let An Estate Planning Firm Help with Your Revocable Trust Needs
If you’re located in North Carolina and need help understanding revocable trusts or creating an estate plan with a revocable trust, the experienced attorneys at Cary Estate Planning can advise you.
Their team takes a personalized approach to ensure your plan fits your unique situation and wishes. Contact their office in Cary, NC, today to schedule a consultation.
