Revocable Trust: What It Is And How To Set One Up

You want to ensure that your home, cherished belongings, and valuable assets are protected and go to your loved ones or charities of choice. When considering your estate planning options, a revocable trust might have been on your radar. A revocable trust can help your family avoid probate and safeguard your privacy.

What Is A Revocable Trust?

A revocable trust, also called a revocable living trust, allows you to place money or property in a trust and give someone else the power to make decisions about the assets. You can make changes to the trust when needed, which may provide more flexibility for your needs than a traditional will.

A revocable living trust is a trust document that is created by someone that can be changed. It also grants someone else the authority to make decisions about assets, such as property, money and valuable belongings, on their behalf. So should they fall ill or get into an accident, another party has permission to make these decisions.

A revocable trust, also commonly known as a living trust, has three key players:

1. The person who creates the trust, also known as the originator of the trust.
2. The trustee. This party is tasked with making key decisions about the property, money or other assets in the trust. A trustee can be a financial institution or individual. There can also be several trustees, known as co-trustees. Trustees can make financial decisions on how to spend and invest the money in the trust for the benefit of the grantor and beneficiaries.
3. Beneficiaries. These are the recipients of the assets in the trust.

The Difference Between Revocable And Irrevocable Trusts

The main difference between revocable and irrevocable trusts is that the terms and provisions in an irrevocable living trust cannot be changed or removed. If you wanted to make changes to an irrevocable trust, it would be very difficult. Provisions in a revocable trust, on the other hand, can be altered or nixed at any time.

Revocable trusts are typically easier to set up than irrevocable trusts. However, irrevocable trusts can offer estate tax benefits that irrevocable trusts don't.  

Irrevocable trusts have an estate tax exemption. This means that property placed under an irrevocable trust isn't factored into the gross value of the estate. So, if there's a large estate, this can reduce the tax liability on estate taxes.

Who Owns The Property In A Revocable Trust?

Technically, the trust owns the property, but the grantor keeps control and ownership of the assets held in the trust for their lifetime. As we talked about, the grantor can make changes at any time to the trust. The grantor is often a trustee with a revocable trust.

Once the grantor passes, the assets are doled out to the beneficiaries.

In a nutshell, the trust is a legal document that gives either you, another individual or institution the authority to manage your money, either for your benefit or the benefit of others.

A trustee is the party legally authorized to manage and execute the assets held in the trust. The successor trustee is an individual or institution that takes over managing the trust once the original trustee passes or becomes incapacitated.

Who Would Benefit From A Revocable Trust?

Curious as to whether you should have a revocable trust? It largely depends on your needs and what you're looking for in an estate plan. A major benefit of having a revocable trust is that it will help avoid probate, which is the legal process for examining the contents of an estate and then distributing them. Probate is an often lengthy, costly process that can be steered clear of altogether with a revocable trust.

Because a revocable trust keeps you out of probate, which becomes public record, your privacy will be maintained. You'll also want to factor in tax liability in your decision to go this route. Likely setting up and maintaining a revocable trust during your lifetime doesn't have any tax benefits nor will it create any tax liabilities. Spend some time to better understand estate tax to get a handle on any tax implications.

Advantages Of Revocable Living Trusts

Revocable living trusts, which are the same as revocable trusts, provide advantages that a will can't. Let's take a look at some of the perks of creating a revocable living trust:

• Maintain privacy. With a revocable living trust, you’ll avoid going into probate, so your trust won't become public record.
• Greater flexibility. With a revocable living trust, as the grantor you can still act as a trustee and maintain ownership. Plus, you have the power to make changes throughout your lifetime, such as changes to your beneficiaries and how you'd like your assets to be handled.
• Protection should you become incapacitated. Should you fall chronically ill or become disabled, you can choose a successor trustee who takes control of your assets and manages your trust by distributing assets and paying your debts.

Disadvantages Of Revocable Living Trusts

Now, we'll go over some of the potential downsides of creating a revocable living trust:

• Changes can be costly. While you have the power to make changes at any time with a revocable living trust, doing so can get expensive. Making amendments can cost anywhere from $350 to $1,000 and upward each time, depending on the type of change and complexity.
• Lacks estate tax benefits. Unlike an irrevocable living trust which can help minimize estate taxes, revocable trusts don't have tax advantages.
• Trust assets aren't shielded from creditors. Because the grantor and trustee have access to the assets, beneficiaries, and provisions in the trust, creditors can go after the assets in your revocable trust or file a lawsuit.

How To Set Up A Revocable Trust

Now, let's go over the steps involved in creating a revocable living trust:

1. Decide What Should Go Into The Trust

First, figure out what you'd like to go into the trust. Make a list of all your assets: real estate, money from bank accounts, life insurance, annuity certificates, business assets, jewelry, fine art, valuable collectibles, and intellectual property, to name a few. Once you've listed all your assets, you can determine what you'd like to include in your trust.

2. Select Your Trustee

You can be your own trustee, and you can also have several trustees or co-trustees. A trustee can be a trusted friend or family member. Your chosen trustees should have a close relationship that's rooted in clear communication and trust. Ideally, they should be able to act with prudence, integrity, clear intentions, unbiasedness, and decisiveness, especially during times of conflict.

It's a good idea to consider selecting a successor trustee. This trustee can take over managing your trust should you fall chronically ill or become disabled.

3. Create A Trust Agreement With An Attorney

Next, consider creating a trust agreement with an estate attorney. A seasoned lawyer who knows the ins and outs of estate planning, trusts and living wills can walk you through the intricacies of creating a revocable trust. If you have a more complicated situation or sizable estate, working with an estate attorney is particularly beneficial. 

4. Sign And Notarize

Once your trust is prepared and finalized, it must be signed and executed. You'll need to go by the laws and protocols in your state.

Most states require your revocable will to be notarized, which comes with an additional fee. Notary fees vary by the type of "notarial act" and by state; expect to pay anywhere from $5 to $25 per notarial act. A notary might also charge a travel fee.

5. Transfer The Assets To The Trust

Your trust becomes official and valid after you transfer assets to it. There are specific processes for transferring trusts that depend on the type of asset being transferred.

FAQs About Revocable Trusts

Here are some questions you might have about revocable trusts:

Are there downsides to a revocable trust?

Potential disadvantages to revocable trusts include that it can be costly to make changes, no estate tax benefits and assets held in the trust aren't protected from creditors.

Which assets shouldn’t go into a revocable trust?

Assets that shouldn't go into a revocable trust include qualified retirement accounts, health savings accounts (HSAs), and medical savings accounts (MSAs). Transferring funds from your retirement accounts to your beneficiaries could put you on the hook for paying income tax. HSAs and MSAs are technically trust arrangements, so you can't trust them to another trust.

What are the most common assets put in revocable trusts?

Homes, money, life insurance policies, and business assets are common assets in revocable trusts.

Is there a difference between a living trust and a revocable trust?

A living trust is created while you're still alive. Living trusts can be revocable, which means you can make changes to it during your lifetime, or irrevocable, which means changes cannot be made to it.

The Bottom Line

Understanding the ins and outs of a revocable trust, the differences between a revocable trust and an irrevocable trust and knowing the steps to create a trust can make sure your assets are well protected and handled correctly after you pass.

Spend time learning about your estate planning options to make the best choice for you and your loved ones. download the Rocket Money^SM app to get a better understanding of your financial life.