The Revocable Living Trust: Your Estate Planning Secret Weapon

Having a sound financial plan makes sense for your future and your family's future.

You may be young. You may be new to real estate investing. But estate plans aren’t just for the wealthy; nor are they for those who are close to retirement.

Estate planning is for anyone who wants to lead a secure life in their retirement years and pass on their hard-earned assets to loved ones.

This article will examine a valuable estate planning tool: the revocable living trust. We'll see what this tool offers, how to create one, and delve into its advantages and potential disadvantages as part of your estate.

What is a revocable living trust?

A revocable living trust (also called a revocable trust) is a written legal document that specifies how you want your assets to be handled when you die.

Since it is a living trust, you create this document during your lifetime. And since it is a revocable trust, you can make changes to it at any time. The main advantage of a revocable living trust over a will is that your heirs will be able to avoid probate, and the details of your estate will remain private.

How do you set up a revocable living trust?

As the creator of the trust, you (the grantor) must name a trusted individual to manage and administer your trust after your death. If you prefer, you also could name a financial institution or legal office as your trustee.

Once you have established the trust, you can transfer assets, including bank accounts, investments, and real estate into the trust. Going forward, you can amend or change the trust whenever you choose to do so (keep that beautiful word "revocable” in mind). Any income generated by the trust's assets goes to you and is subject to taxation.

For some assets, you will need to have to notify insurance companies, banks, and transfer agents about the trust. You may need to update beneficiaries, get new investment certificates, retitle vehicles, and sign new deeds accordingly.

You should also consider establishing a pour-over will, a financial tool that allows unallocated or unfunded assets to "pour over" into your trust.

Irrevocable vs. Revocable Living Trusts

With a revocable living trust, you can change or even void a trust at any time during your lifetime. If you want to remove a specific beneficiary, you do that as well. No one needs to sign off on the changes; it is up to you as the grantor.

On the other hand, with an irrevocable living trust, the grantor gives away all ownership rights to the assets. Why would someone want to set up an irrevocable trust? The answer has to do with taxes.

Does a trust need to file a tax return? The IRS views a revocable trust as a grantor's trust and not a separate entity. The income from a revocable trust must be reported on the grantor's personal tax return. However, since the assets in an irrevocable trust are no longer yours, the trust itself pays all the taxes.

After the granter of a revocable trust dies, a revocable trust becomes irrevocable. No further changes can be made to the trust, and it works the same as an irrevocable trust.

What are the benefits of a revocable trust?

We've already stressed the main advantage of a revocable living trust: its flexibility. You’ll appreciate this benefit if you are doing your estate planning early in your career.

Here are some of the other benefits of this financial tool:

  • A revocable trust can cover your assets if you become incapacitated. If you are unable to manage your own affairs, your trustee will step in and manage the trust. This changeover can happen automatically without any court involvement or other delays.
  • Revocable living trusts can include your wishes for guardianship and spending habits for minor children.
  • Revocable trusts do not go through probate. Your beneficiaries will not have to wait or pay for court proceedings.
  • A revocable trust may cost more money to set up than a regular trust, but it can save money and hassles later since it holds up better to court challenges.
  • Unlike a will, a revocable living trust is not part of the public record. The identity of your beneficiaries and the distribution of your assets can remain private.
  • The Federal Deposit Insurance Corporation (FDIC) offers insurance of up to $250,000 for each beneficiary of a revocable living trust—up to a maximum of $1,250,000.

What are the disadvantages of a revocable living trust?

The initial process of creating a revocable living trust can be expensive and time-consuming if you aren’t getting help from an asset protection attorney near you. For example, you may need to get new titles for some of your real estate assets.

After you have created the trust, you need to update it every time you purchase a new asset or open a financial account. Any assets you do not place into the trust will become part of the probate process after your death.

Also, if your marital status or parental status changes, you will need to update the trust. These changes in life circumstances will not automatically be part of the trust.

What are the main differences between a revocable living trust and a living will?

Understanding living trusts is a bit of a learning process. You may be wondering if you need a living trust, a will, or both. The answer is both in many cases.

Both a living trust and a living will allow you to plan the distribution of your assets and name your beneficiaries. You also can revise each document as you wish during your lifetime.

However, a living will go into effect only after your death. A living trust covers your assets in three areas – while you're alive and well, if you're incapacitated, and after you pass away.

Another key difference is that a will must go through probate and become part of the public record. On the other hand, living trusts remain private and avoid probate.

If you have minor children, a will allows you to name their guardians. A revocable trust does not include this information. It only allows you to determine when your children can receive their inheritance and to name will administer the trust for your children until they reach age 18.

Whether a revocable living trust is right for your estate plan depends on your individual circumstances. You'll also want to consider the rules regarding trusts in your location since they can vary state by state. You may want to consider a land trust vs. a living trust. Unlike a living trust, which can hold any type of asset, a land trust holds only real estate or property-related assets such as notes, mortgages, and air rights.

As we've seen, revocable trusts do take some time and planning to create, but they have many long-term advantages for you and your beneficiaries. You can find some revocable living trust templates online, but we recommend that you consult your attorney to find out what best meets your needs and financial goals.

Last Updated: 
June 16, 2021

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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