A revocable trust is a legal arrangement in which a person — called the grantor — transfers ownership of their assets into a trust during their lifetime while retaining full control over those assets. It is one of the most popular and flexible estate planning tools available and is used by millions of Americans to avoid probate, maintain privacy, and plan for incapacity.
How a revocable trust works
When you create a revocable trust you transfer ownership of your assets — such as your home, bank accounts, and investments — into the trust. You name yourself as the trustee, which means you continue to manage and control those assets exactly as you did before. You can buy and sell property, move money in and out of accounts, and change the terms of the trust at any time.
You also name a successor trustee — the person who takes over management of the trust when you die or become incapacitated. At that point the successor trustee distributes your assets to your beneficiaries according to the trust’s instructions without any court involvement.
What makes it revocable
The word revocable means that you can change, amend, or cancel the trust at any time during your lifetime as long as you are mentally competent. This flexibility is one of the main reasons revocable trusts are so popular. You are never locked into the terms of the trust and can update it as your circumstances change.
This is in contrast to an irrevocable trust which generally cannot be changed or canceled once it is created.
Revocable trust vs will
Both a revocable trust and a will direct how your assets are distributed after death but they work very differently:
- A will must go through probate court before assets can be distributed. A revocable trust bypasses probate entirely.
- A will becomes a public record during probate. A revocable trust remains completely private.
- A will only takes effect after death. A revocable trust also protects you if you become incapacitated during your lifetime.
- A will is generally less expensive to create. A revocable trust costs more upfront but can save significant time and money by avoiding probate.
Does a revocable trust avoid estate taxes
No — a revocable trust does not reduce or eliminate estate taxes. Because you retain full control of the assets during your lifetime the IRS still considers them part of your taxable estate. If reducing estate taxes is a goal an irrevocable trust or other advanced planning strategies may be more appropriate.
Does a revocable trust protect assets from creditors
No — because you retain control of the assets in a revocable trust they are not protected from your creditors. If you are sued or face financial difficulties creditors can still reach assets held in a revocable trust. An irrevocable trust offers creditor protection but at the cost of giving up control of the assets.
What assets can go into a revocable trust
Almost any asset can be placed into a revocable trust including:
- Real estate and property
- Bank and investment accounts
- Stocks and bonds
- Business interests
- Personal property such as jewelry, artwork, and vehicles
For the trust to work properly assets must be formally transferred into it — a process called funding the trust. Real estate is transferred by recording a new deed in the name of the trust. Bank and investment accounts are transferred by updating account ownership with the financial institution. An unfunded or partially funded trust provides limited benefit so this step is critical.
Do you still need a will if you have a revocable trust
Yes — most people with a revocable trust also have a simple will called a pour-over will. A pour-over will captures any assets that were not transferred into the trust during your lifetime and directs them into the trust upon your death. It also allows you to name a guardian for minor children which a trust cannot do.
Who should consider a revocable trust
A revocable trust is worth considering for people who:
- Own real estate especially in more than one state
- Want to avoid the cost delay and public nature of probate
- Want to plan for the possibility of incapacity
- Have a blended family or complex family situation
- Want to keep their financial affairs private
- Want to provide for a beneficiary with special needs through a sub-trust
How to create a revocable trust
A revocable trust is typically created with the help of an estate planning attorney who drafts the trust document according to your wishes and your state’s laws. The document names the trustee, successor trustee, and beneficiaries and describes how assets should be managed and distributed.
Once the trust document is signed and notarized the next step is funding the trust by transferring assets into it. This is an essential step that is sometimes overlooked.
Key terms to know
- Grantor — the person who creates and funds the trust
- Trustee — the person who manages the trust — usually the grantor during their lifetime
- Successor trustee — the person who takes over management of the trust when the grantor dies or becomes incapacitated
- Beneficiary — the person or organization that receives assets from the trust
- Funding the trust — the process of transferring assets into the trust
- Pour-over will — a will that directs assets outside the trust into it upon death
- Revocable — can be changed or canceled at any time during the grantor’s lifetime
- Irrevocable — generally cannot be changed once created
Sources
- USA.gov — Estate Planning
- American Bar Association — Public Resources
- National Institute on Aging — Getting Your Affairs in Order
This article is for general informational purposes only and does not constitute legal advice. Laws vary by state. Consult a licensed attorney for guidance specific to your situation.