Estate planning can be time-consuming and complex. For someone who isn’t a financial planner or an estate attorney, understanding the language may feel impossible – and you may need guidance to determine which estate planning options are best suited to your needs.
At Addition Financial, we work with members every day to help them manage their money. One estate planning question we want to address is this:
“When is the right time to establish a revocable trust?”
If you’re wondering about revocable trusts, keep reading. We’ll give you the information to understand what they are, how they work and whether you should establish one as part of your estate.
What is a Revocable Trust?
A revocable trust is sometimes referred to as a “living trust” because it is a trust that may be opened at any time during your life and altered at any time until you die. The fact that it can be changed differentiates it from an irrevocable trust. Irrevocable trusts are set in stone once they are created and may not be changed for any reason.
A revocable trust is not a tax shelter. Any money or assets that you put into or remove from the trust are subject to regular taxation. They have other advantages which we’ll talk about, but they do not reduce your taxable income or shield your heirs from paying taxes on their inheritance.
How do Revocable Trusts Work?
As we mentioned above, a revocable trust may be changed at any time while you are alive. Mary Kaplan of The Kaplan Firm told us:
“The revocable trust is a modifiable trust that is set up during your life. It is a flexible document that you or an attorney can draft for you. A joint trust means both partners have pulled all of their money together in this one trust.”
It may be helpful to think of a revocable trust as a safe to which you have the combination. You can open it and swap out contents at any time and without limitation. You can add or subtract assets, change beneficiaries and alter the terms of inheritance as long as you are living.
When you die, the trust becomes fixed. The final structure of the trust is now carved in stone and will determine who will receive the assets in the trust and when they will receive them.
When you set up a revocable trust, you must appoint a trustee whose job it is to act in the grantor’s best interest. (The person who creates the trust is the grantor.) In many cases, the trustee is a trust company or bank.
What Are the Benefits of a Revocable Trust?
There are several significant benefits to establishing a revocable trust. It’s one of the best ways to protect your family in the event of your death. Here are the benefits you should know about.
Flexibility
The first benefit of a revocable trust is one we have already discussed: flexibility. With a revocable trust, you can make any changes you want whenever you want to. For example, if one of your children married someone with children of their own and you wanted to include those kids as beneficiaries of the trust, you can do so easily.
You may add or remove assets, change beneficiaries and change the terms that dictate how and when beneficiaries may withdraw money from the trust.
Avoid Probate
When you die and leave an estate, it’s very common for the estate to be required to go through probate, a lengthy process that can prevent your heirs from using the money you have left behind to pay for ordinary expenses. One of the biggest benefits of a revocable trust is that it does not need to go through probate.
A revocable trust is especially useful if you have a large estate or own properly in more than one state. Without a trust, each property would be required to go through probate in the state where it’s located.
Avoid Conservatorship
There is one area where a revocable trust has advantages for you while you’re alive. If you become incapacitated, the trustee you designate can distribute funds according to your wishes and make it easier for your family to get what they need.
By contrast, without a trust your family might have to go to court and have someone appointed as a guardian or conservator to manage your money. It can be a lengthy process that can add to your family’s stress.
Maintain Confidentiality
When you die and your estate goes into probate, anybody can go to the courthouse and look at your will and other documents. If it’s your preference to keep your financial affairs private, then a revocable trust offers protection.
The terms and conditions of a revocable trust are private. They are not required to be filed in court and thus, do not become part of the public record.
Disadvantages of a Revocable Trust
There are a few potential downsides to establishing a revocable trust. They include:
- The costs of setting up a revocable trust may be high because you’ll need to hire a lawyer, create paperwork and pay fees.
- Any property you put into the trust will need to be re-registered in the name of the trust.
- You’ll need to amend the trust when your life circumstances change. For example, if you get divorced or have another child, the terms of the trust won’t change automatically. You will need to update them to reflect the changes.
- Your heirs have more time to dispute the terms of a revocable trust than they would the terms of the will – sometimes as long as five years.
- You may still need a will if you have assets outside the trust.
In many cases, the costs and work associated with setting up a revocable trust are worthwhile because the potential benefits outweigh them.
When Should You Establish a Revocable Trust?
The decision to establish a revocable trust is one that may feel complicated. It’s typical for people to have questions about when it makes sense to set up a trust. Here are some guidelines for you to use.
Minor Children
If you have minor children, it makes a lot of sense to create a revocable trust to hold and invest money for them until they come of age. In most states, a revocable trust will hold money for children until they turn 25.
The money in a revocable trust cannot be accessed by anybody except the trustee you designate. It is their fiduciary responsibility to act in your best interest and the best interest of your heirs when managing money.
Multi-State Holdings
As we mentioned above, if you own property in multiple states and die without a revocable trust, those properties will need to go through probate where they are located. Since the probate process can be a lengthy one, it can cause significant delays for your heirs.
For that reason, transferring real estate into a revocable trust may be the right choice. It will help your heirs to avoid probate. If you decide to establish a revocable trust, remember that you must retitle the property you transfer to the trust. That process may be time-consuming but it won’t be as time-consuming or complex as dealing with multiple probate courts.
You Want to Protect Your Family if You Become Incapacitated
If you were to become incapacitated due to an illness or accident, you would be unable to make financial decisions. There are things you can do to ensure continuity, including the creation of advance directives such as a durable power of attorney and a medical proxy.
Another option is to put your assets in a revocable trust. If you are unable to make decisions or manage your money, the trust can do it for you according to your wishes and the rules you specify. The existence of the trust will ensure that your family has the money they need to pay for your care and for their own expenses.
You Want to Reduce Your Heirs’ Tax Burden
A revocable trust will not reduce your tax liability while you’re alive. However, in some circumstances it may be used to offset your heirs’ tax liability. One example is an irrevocable life insurance trust.
Your gifts to the trust are used to buy a life insurance policy with the trust as the beneficiary. Upon your death, the trust can distribute the life insurance proceeds to your heirs to help them pay estate taxes.
Establishing a revocable trust isn’t for everybody but, as you can see, there are some significant advantages if you have minor children or a large or complex estate. The financial and administrative advantages can make things easier for your family after you pass and help them to avoid a lengthy probate process or excessive legal fees.
Do you need help managing your assets or have questions about revocable trusts? Click here to schedule an appointment with one of our financial experts at Addition Financial.
