Revocable Living Trust - Do You Need One?

Estate Planning, Family, Marriage, Must Have Documents, Taxes, Trust, Will

July 07, 2023

As I often talk about on my Women & Money podcast, having a revocable trust in place is one of the most important things you can do to protect yourself and your family. So many of you still don’t have one, and I have to be honest it makes me a bit nuts. l want to give you a full rundown of what living revocable trusts are, and why they are so important regardless of your age and net worth. As you will learn, trusts are even more beneficial for people who have very little money.

Revocable Trust 101

To put it simply, a revocable trust is a legal document that spells out how your assets will be managed if you become unable to do so yourself, and how your assets will be distributed upon your death. There are three important roles involved in a living revocable trust document.

  • Grantor: The grantor is the creator of the trust. As the grantor, you get to make all the decisions about which assets will be put into the trust, who will manage them, and who will receive your assets after your death.
  • Trustee: The individual who manages the trust assets is called the trustee. You can appoint a third party to manage the trust, or you can act as trustee yourself during your lifetime. You will also need to appoint a successor trustee to manage the trust after your death.
  • Beneficiary: This is the person or group who is entitled to the assets being managed in the trust and is the individual or group that the trust is created for.

A living trust means that it is effective during your lifetime. And because it is revocable, you can modify it whenever you want while you are alive, and can also move assets into and out of the trust as you please.

Funding your living revocable trust is the next step, and you CANNOT forget about this people! For the assets that you decide to put inside the trust, you will need to change the title of ownership of each one to the trust. It is common to add personal property, bank investment accounts and real estate to the trust. Retirement accounts however, such as your IRA or 401(k), cannot be held within your trust.

Why a Will Isn’t Enough

I want to talk about why it is important to have BOTH a living revocable trust and a will. Unlike a living will, a living revocable trust is helpful for far more than simply dictating where your assets are to go upon your death. A living trust also protects you while you are still alive. Even if your accounts are set up as “payable upon death” (POD), that will only kick in after you die. That means whomever you add as POD on your accounts does not have the authorization to use or manage the funds in your trust on your behalf while you are living. You must think about what if something happens, and you become ill or incapacitated. You have got to consider who will take care of you and pay your bills. A key difference between a will and a living revocable trust is that the living trust has an incapacity clause that states who you want to manage your affairs in the event you are unable to do so yourself.

Probate Problems: The Issues with Probate Court

Also, if you only have a will when you die, it will need to be submitted to probate court. Before your assets can be distributed, you will need a judge’s approval. That can be a very lengthy and expensive process because you will need to hire a lawyer. I wouldn’t recommend that you even try to navigate the probate process without one. There are also fees that your family will need to pay when you go through probate. If you are concerned at all about privacy, you should also know that the probate process makes your will public record, so anyone can read it. 

If you have a living revocable trust, you can avoid probate entirely. The person you appoint to take over managing your trust will simply follow the instructions you laid out in the trust document to distribute your assets. You can learn more about the differences between wills and trusts on my blog.

Who Needs a Revocable Trust?

Living Revocable Trusts for All Life Stages

As I have already mentioned to you, living revocable trusts ensure efficient estate planning, and are an important protection in case you become disabled while you are alive. Really though, they are important to have during any life stage. Here are a few examples of other times in your life you’ll need one.

  1. Getting married. If you are getting married and have assets that you acquired prior to the marriage, you can put these assets in your living revocable trust so that they are separate from the community property assets that you share with your spouse. That way the assets in your living revocable trust will be protected if you and spouse eventually divorce.
  2. Purchasing a home. When you are purchasing a substantial asset like a house, it’s important to have it moved into the trust because you will have complete control over what happens to it after you die, and you can change your mind about who it will go to after your death at any time.
  3. Starting a business. Putting your business assets in a living revocable trust is incredibly important because if you become ill or incapacitated in any way, your family members can continue running the business for you which will support you financially while you are unable to work.
  4. Having a baby. It’s also very important to have a living revocable trust in place once you start a family. When you have your assets in a trust, if you die prematurely your successor trustee can start to immediately give funds and other support to your minor child. A trust will also be important in this case because without one, any possessions that are left to your child will immediately become available to them when they turn 18. If you have a trust in place you can outline when, under what circumstances, and in what amounts the trust assets can be distributed. You can choose to distribute your estate to them over time, or delay all distributions until your child reaches a certain age.

Revocable vs Irrevocable Trusts: Pros and Cons

Be mindful of the key difference between a revocable trust and an irrevocable trust. With an irrevocable trust, as soon as the grantor transfers the assets into the trust, they remove all their rights of ownership to the trust and those assets. They can’t make any decisions about how the assets should be managed, or if they should be sold. Since the assets are no longer owned by the grantor, they are removed from the grantor’s taxable estate and are protected from creditors. Because of this, irrevocable trusts are best for people with large estates who are worried about high tax bills after their death. Remember that currently in the US, the federal estate tax exemption is 12.6 million per person. So you would need to have a very sizable estate upon your death to benefit from this tax break.

With a living revocable trust, you can change your mind about the terms of the trust as often as you want, and you retain full control over the assets held in the trust. For example, if you put your house in your trust, you can sell it or decide to move it out of the trust whenever you see fit. Remember that because you retain control over your assets, they will all still be considered part of your taxable estate and will not be protected from creditors.

What are the Key Benefits of a Living Revocable Trust?

To summarize, below is a list of the most important ways a living revocable trust will benefit you and your family.

  1. You are protected if you become disabled because someone is appointed to immediately start taking care of you and your finances.
  2. You avoid probate court, which keeps the details of your estate private after your death and ensures your assets will be efficiently distributed.
  3. You can still manage your assets within the trust throughout your lifetime and can chose to move assets in or out of it as you please.
  4. You can modify the terms of the trust at any time, including who your beneficiaries are and what each one of them will receive after your passing.
  5. Your trust will protect you and your family during important life transitions including getting married, purchasing a home, having a child, or starting a business.

After learning more about living revocable trusts, I want you to take some time to think about how creating one will soften the burden for you and your loved ones down the line. The truth is, you are making it as easy as possible for them under the most difficult of circumstances, and that is one way to truly show how much you love them.  

It makes me so upset to hear about what happens to people and their families, who have the best intentions at heart, when these documents are not in place. You can find more info on the Will & Trust resource page. I encourage you to check it out so that you can avoid this costly mistake. 

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