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What Is a Revocable Living Trust?
A revocable living trust is a legal document that's part of your estate planning. It's something you create while you're alive that details how your assets should be handled once you pass away. Your assets can include real estate, the money in your bank accounts, investments, and any valuable possessions. It's called a revocable trust because you can make changes whenever you wish. You can add or remove assets, change who your beneficiaries are, or who should be in charge of making sure your trust is managed correctly when you die.
Revocable vs. Irrevocable Living Trust
When you're going through the estate planning process, you'll likely hear about a revocable and an irrevocable trust. To decide which is the best for your situation, consider the differences between the two.
Revocable Living Trust
A revocable living trust is completely amendable during your lifetime. You can change the provisions set forth in it, your beneficiaries, and your successor trustee whenever you'd like. You can add assets, like if you buy a vacation home, or assign certain assets to different people, like a family ring to a newborn granddaughter. This type of trust is also tied to your social security number, so you'll pay taxes similar to your personal tax return should there be any income your trust makes.
It's important to note that since you can no longer make changes to your revocable living trust once you pass away, your revocable trust becomes irrevocable upon your death.
Irrevocable Living Trust
An irrevocable living trust can be amended, but you must get approval from every person named in the trust before you make any adjustments. The reason is that with an irrevocable living trust you are dismissing yourself from any ownership right to the assets you've listed in your document. It may not seem like a big deal to need approval but consider as an example if you want to remove a beneficiary. In this type of trust, the beneficiary must acknowledge and sign that they approve your decision before you can execute it.
Taxes for an irrevocable living trust is different, too. Since you are relinquishing asset ownership and the trust now owns the assets, the trust will pay its own income taxes.
The Basics to Include in a Revocable Living Trust
There are certain things you want to make sure you include in a revocable living trust. They include:
- Beneficiaries: Your beneficiaries can include family members, close friends, and even charitable organizations. Beneficiaries are whoever or whatever you want to leave some of your assets to. When creating your revocable living trust, you can list out exactly how your assets should be distributed upon your death.
- Successor trustee: As the owner of the trust, you are the trustee and you're responsible for managing your own trust while you're alive. However, you'll want to list a successor trustee to manage your estate once you pass away. The successor trustee is in charge of all the trust administration, including tax returns and asset distribution. Because of their high level of responsibility, your successor trustee should be someone you trust and who is responsible enough to carry out your wishes after your death.
- Assets: Take an inventory of your assets, then make sure they are included in your revocable living trust. Assets should include any property you own, valuables and family heirlooms, investments, and more. You can even include items that have only sentimental value if you want to make sure that someone specific receives them.
These are the basics of what to include in your revocable living trust, but your work isn't done. Most of the assets you've listed will also need to have updated ownership documents. Once you've named something in the trust, like a home, you'll need to retitle your asset in the name of the trust. This also applies to bank accounts, vehicles, and investments.
Advantages of a Revocable Living Trust
There are many benefits to having a revocable living trust in place, including:
- Flexibility: Consider how having the ability to change your assets list or beneficiaries is crucial to making sure your property is distributed the way you've intended. Especially if you start your estate planning young, it's very likely you'll have items and beneficiaries to add as you age. Read more about why estate planning is so important .
- Avoid probate: Probate is a court-supervised legal proceeding that is used to verify your will and make sure that your assets are distributed as they should be after your death. Probate can be a lengthy and expensive process, especially if you don't have proper documents in place and have a lot of assets. However, any asset listed in your trust will pass directly to your beneficiaries without having to wait for court approval. This is the responsibility of the successor trustee.
- Privacy: Unlike other court documents , including your last will and testament, your trust is private and nobody can access the information in it. This privacy serves as a protection against the public knowing your assets and your beneficiaries.
- Coverage: A revocable living trust isn't just for when you pass away, although this is the most common scenario. This type of trust also covers you if you become incapacitated or unable to care for yourself. At that point, your successor trustee can manage your trust for you, and they have a fiduciary duty to make decisions that are in your best interest. A revocable living trust also covers guardianship. You'll be able to outline provisions for your minor children, such as their living situation and how (and how often) your money is distributed to them.
- FDIC protection: The FDIC, or Federal Deposit Insurance Corporation, financially protects each beneficiary up to $250,000 up to a total of $1,250,000 for the entire trust.
Even though these advantages are major, there are some things to remember when it comes to trusts. Most notably, estates do not bypass tax requirements. Even if your trust avoids the probate process, you may still have a taxable estate. There is a federal estate tax limit, so your estate will only have to pay taxes once it reaches a certain net worth, but each state may also have its own laws regarding state tax on certain estates.
Image via Unsplash by sctgrhm
Who Should Have a Revocable Living Trust?
It's a common misconception that estate planning documents are only for the wealthy or well-established, but this couldn't be further from the truth. Because creating a revocable living trust can add a lot of additional cost to the formation of your estate planning documents, you may not want to create one unless you have significant assets to account for.
However, consider the assets you do have and that you can always amend your revocable living trust as you gain assets or increase your net worth. Once you have your revocable living trust in place, it's a much simpler process to adjust any details or provisions. You'll also want to consider creating a pour-over will, which allows any unnamed or unallocated assets to go directly into your trust. It may be difficult to remember to include every asset in your trust, and this type of will helps make sure you're covered.
Even if you don't yet know who to name as your beneficiary or which assets you'll have during your lifetime, a revocable living trust can be a powerful document in your estate planning. Although you can create your revocable living trust yourself, especially if it's uncomplicated, an estate planning attorney can guide you in creating one for your unique situation and familial circumstances. Then, you'll have a trust that benefits you and the people or organizations you care about the most.
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