How Does a Revocable Trust Work? What Are the Benefits? What Are the Limitations?
When you’re setting up your estate plan, your attorney may recommend a revocable trust as a way to protect assets and ensure the orderly distribution of your estate. What is a revocable trust? How does it work? What are the potential benefits of creating a revocable trust? Are there any downsides to using a revocable trust?
What Is a Trust?
A trust is a legal tool that creates a separate legal entity capable of owning, obtaining, selling, and managing assets. A trust is created through the execution of a trust document, which identifies who will hold the assets (the trustee), as well as the beneficiaries of the trust. When a trust is created and assets are transferred to the trust, the person creating the trust (the grantor) no longer owns the property. Any property placed in a trust remains in the trust upon the death of the grantor, subject only to the terms of the trust document.
What Is a Revocable Trust?
A trust is identified as either revocable or irrevocable. A revocable trust is one which, as the term suggests, may be changed or even terminated during the lifetime of the grantor. Typically, the grantor acts as the trustee of a revocable trust. If the trust remains in place when the grantor dies, it automatically becomes an irrevocable trust, unless the grantor (or the trust) names a successor trustee.
What Are the Benefits of a Revocable Trust?
A revocable trust allows for maximum flexibility, as the grantor/trustee can amend or terminate the trust to accommodate changes in their life, such as:
- Divorce, death of a spouse, or remarriage
- Birth of new beneficiaries
- Accumulation or disposition of property
With a revocable trust, the grantor can also name a successor trustee at any time or amend trust documents to replace a successor trustee. If there are beneficiaries who cannot legally own property because of age or some other lack of legal capacity, the trust can hold the property for them and the grantor can control how the property is managed and distributed.
What Are the Limitations of a Revocable Trust?
Because they can be changed or terminated during the grantor’s lifetime, revocable trusts don’t have the same legal benefits that irrevocable trusts offer. While assets in a revocable trust will avoid probate, they are still subject to state and federal estate taxes. In addition, assets placed in a revocable trust do not enjoy protection from creditors. A person cannot transfer assets to a revocable trust to avoid a judgment and then take the assets back. (In contrast, property placed in an irrevocable trust is not subject to claims by creditors of the grantor.)
Finally, because of the potential for amendment and even termination, revocable trusts typically require more hands-on administration and potentially more expense.