A revocable trust is an estate planning tool that is considered, for many reasons, to be a more effective tool than a will. At a simple level, a revocable trust is a legal document that designates where your assets go after your death.
The trust is created when you are living and can be modified at any point during your life. This provides you with flexibility when you are alive, if you need access to certain assets. When you die, whatever assets are in the trust transfer to your beneficiaries. With an idea of the basic principles, let’s take a look into all of the benefits included in a revocable trust.
Benefits of a Revocable Trust
As we have learned, a revocable trust can be updated, changed or revoked at any time. This is part of the reason that many financial experts suggest that you set up a revocable trust. Some of the other benefits that a revocable trust provides are as follows:
As mentioned, you can make modifications at any time to a revocable trust. If circumstances change, you are allowed to alter asset allocation, beneficiaries, etc. to your discretion. If you are the trustee for your account, you can make withdrawals as well if it is called for. This feature makes a revocable trust a popular choice for those starting out estate planning.
Follows the Wishes of the Trustor
A Revocable Trust will provide a detailed list of assets to be distributed to the beneficiaries. The named trustee will work with the executor on the estate to transfer assets that are outlined within the trust. Since the trust can be modified or updated as much as you wish while you are living, this will always follow the last wishes of the originator of the trust.
Avoiding Probate Process
With a revocable trust you can bypass probate court, and you will not need to wait for a court order to have the trustee pass assets on to the beneficiaries. You get the benefit of privacy — since the asset transactions will not enter the public record through the probate courts. Other reasons to avoid probate are:
- Privacy: The probate process makes all of the information public records. This includes who you named as beneficiaries, size and list of assets, and more.
- Time: This process is slow and may take many months to be resolved
- Expensive: Probate is costly and attorney fees can eat into the beneficiary’s inheritance.
Assets Are FDIC Insured
The owner of a revocable trust account is insured up to $250,000 for each primary beneficiary. The amount of coverage will depend upon the number of beneficiaries. For example, if there are 5 beneficiaries on the account then it would be insured $250,000 x 5 = $1,250,000. There are stipulations and conditions if there are more than 5 beneficiaries named. The full details can be found here.
Revocable vs Irrevocable Trusts?
If you can make changes at any point with a revocable trust, that means in an irrevocable trust — no changes can be made after it is created. The originator cannot access the assets placed within the trust after its creation, not without the consent of the beneficiaries. The assets are basically not yours anymore if you create an irrevocable trust.
Revocable Trusts Summary
Revocable trusts are common vehicle used in estate plans. To recap its core benefits:
- Flexible: Able to updated or modified at any time
- Avoid probate court: Offers protection from the costly, and long probate court process
- Insurance: Assets are FDIC insured up to a certain point ($250,000 per beneficiary)
Revocable trusts have their downfalls too. Assets are not frozen inside a revocable trust, so they do not provide shelter from creditors. For example, if you are sued, assets in the trust can be liquidated in order to pay for any settlement that comes from the lawsuit. Also, when the originator of the trust dies, the estate becomes taxable at the state and federal levels.
Irrevocable Trusts Summary
An irrevocable trust (IT) has a couple of advantages. First, they remove the assets from the taxable estate, hence there is no estate tax upon death. Also, there are tax benefits on income earned on assets while in IT, acting as a tax shelter on earnings. The main shortcoming of an irrevocable trust is their lack of flexibility. The originator cannot touch the assets once they are placed within the trust.
Revocable Trust vs Will
A revocable trust can be modified up until the death of the trustor, at which the handling of assets passes to the trustee. This is where you should place all of the big ticket items, such as real estate, etc. This successor will then handle the affairs as you have laid out in the trust. All the while you are avoiding probate and court systems.
With a will, you can handle more of the personal items that you wish to pass on. Any items you want to go to specific heirs, such as electronics, pets, jewelry, furniture, other personal belongings, etc. should be included in a will. The most important inclusion is the guardianship of your children you leave any may behind. If you do not want your children’s placement to be left to the courts, you must have a will to designate who shall be the primary caretaker.
Final Thoughts: Start Planning Your Estate
If you want to plan properly for your estate, and protect your loved ones, you absolutely need to have both a living revocable trust as well as a will. A living revocable trust is effective while you are alive. You can make modifications as you go along and things change. A will is a necessary tag- along that covers some of the minor personal belongings as well as caretaker designations (if applicable).
Setting up either a revocable trust or a will is possible to do online for free, using a financial advisor, an estate planning attorney or an online estate planner. No matter what method you choose, it is essential to set one up if you want to safely and securely manage your estate plan.