Definition
A revocable trust is a type of legal entity that allows property or assets to be held, managed, and distributed on behalf of the person who created it (the grantor). The key feature of a revocable trust is that it can be altered, changed, or terminated by the grantor during their lifetime. If the grantor passes away, the trust generally becomes irrevocable and the assets are distributed as outlined in the trust agreement.
Phonetic
The phonetics of the keyword “Revocable Trust” can be pronounced as: /rɪˈvəʊkəbəl trʌst/
Key Takeaways
Revocable Trusts: Three Main Takeaways
- Control: The creator or grantor of a revocable trust has the ability to change or terminate the trust during their lifetime. All assets placed into the trust can be controlled by the grantor.
- Estate Planning tool: Revocable trusts are a valuable tool in estate planning. They provide the opportunity to place assets in trust for the benefit of chosen beneficiaries, to be dispersed upon passing away. This also generally allows for the assets to bypass the probate process, making the transition smoother and less complicated.
- Privacy: In comparison to a will, a revocable trust provides greater privacy after the grantor’s death. Unlike a will, a trust is not made public, keeping the distribution details and beneficiaries private and confidential.
Importance
A revocable trust is an important financial instrument in estate planning because it allows for the management of assets during one’s lifetime and the smooth transfer of wealth after one’s death. It is called “revocable” because the trust creator or grantor can change, modify, or terminate the trust at any time during their lifetime. This flexibility allows the grantor to adapt to changes in their financial situation, beneficiaries, or other personal circumstances. Additionally, assets held in a revocable trust bypass the probate process, ensuring a timely distribution of the assets to the beneficiaries and maintaining privacy by keeping the estate’s details out of public records.
Explanation
The purpose of a Revocable Trust, often known as a “living trust” , primarily lies in its ability to provide clear instructions for the disposition of assets during the grantor’s lifetime as well as after death, while offering the flexibility of being adjusted or dissolved as per the grantor’s wish. This type of trust is mainly used by individuals who want to avoid the probate process, which can be a lengthy and costly legal proceeding. A properly structured revocable trust allows the assets to be transferred to the beneficiaries without the need for court involvement, utilizing the designated trustee to manage assets and distribute them according to the grantor’s instructions, hence proving efficient in time, privacy, and often financial matters.Revocable trusts serve other functions as well, such as maintaining control over assets even if the grantor becomes incapacitated. When the grantor of a revocable trust passes away or can no longer manage their own affairs, control over the trust’s property typically passes to a successor trustee who can manage the property as per the grantor’s instructions. This can provide considerable peace of mind, knowing that your assets will be managed according to your desires even if you are no longer capable to do so yourself. Additionally, despite the use of the trust for bypassing probate, it is still subject to estate taxes as the grantor retains control over the assets during their lifetime.
Examples
1. Estate Planning: Acclaimed novelist and billionaire John wants to ensure that his wealth is well-distributed to his family after his death, so he creates a revocable trust, also known as a living trust, and transfers his assets into it. As per the terms he sets, his assets will be managed, invested, and distributed to his beneficiaries in the event of his incapacity or death. During his lifetime, he can add or remove assets from the trust, as per his convenience.2. Retirement and Medical Care Planning: Emma, a 70-year-old widow, owns properties and personal assets. Wishing to avoid the complex process of probate after her death, she establishes a revocable trust and transfers ownership of her assets to it. She also designates it to be used for her medical care should she become incapacitated. In this case, Emma’s trust allows her to maintain control of her assets during her lifetime and ensures her physical well-being is taken care of should she become unable to make decisions herself.3. Business Succession Planning: George, founder and CEO of a successful technology company, creates a revocable trust as part of his business succession planning. In the trust, he puts specific instructions for the business’s management and continuation if something were to happen to him. George retains the right to alter these instructions at any time while he is still living. This allows George to ensure the business remains in the family under the assigned responsibilities while also avoiding the probate process.
Frequently Asked Questions(FAQ)
What is a Revocable Trust?
A Revocable Trust is a trust agreement that allows changes or dissolvement of the trust by the trustmaker at any time during their lifetime. This trust provides flexibility as the trustmaker’s situation or desires change.
Who are the parties involved in a Revocable Trust?
The three parties in a Revocable Trust are the trustmaker (also called the grantor or settlor), the trustee managing the trust, and the beneficiaries who receive the trust’s assets.
What is the main advantage of a Revocable Trust?
The main advantage of a Revocable Trust is its flexibility due to its revocable nature. It allows the trustmaker to amend, modify, or revoke the trust entirely according to their needs.
Is a Revocable Trust helpful in avoiding probate?
Yes, one of the key advantages of a Revocable Trust is that it avoids probate, which can be long, expensive, and public. The assets in a revocable trust bypass the probate process and go directly to the beneficiaries after the trustmaker’s death.
Are assets in a Revocable Trust protected from creditors?
No, a Revocable Trust does not generally provide protection from creditors because the assets remain in the ownership of the trustmaker. Upon the trustmaker’s death, the assets can be used to satisfy their outstanding debts.
What happens to a Revocable Trust after the death of the trustmaker?
Upon the trustmaker’s death, a Revocable Trust becomes irrevocable. The named trustee will then manage and distribute assets directly to the beneficiaries according to the terms of the trust.
Can assets in a Revocable Trust be taxed?
Yes, because the trustmaker can control and manage the trust assets, these are subject to federal estate taxes. The trustmaker is also liable for income tax on any income the trust generates.
What is the difference between a Revocable Trust and an Irrevocable Trust?
The primary difference is that a Revocable Trust can be changed or terminated by the trustmaker during their lifetime, while an Irrevocable Trust cannot be changed or terminated without the beneficiaries’ permission once it has been established.
Related Finance Terms
- Grantor: This is the person who creates the revocable trust. They can transfer their assets to the trust and have the ability to terminate it.
- Trustee: This is the individual or organization appointed to manage the trust assets in a revocable trust. The Grantor often acts as the initial Trustee in a revocable trust.
- Beneficiary: This is the person who benefits from the trust. In a revocable trust, the grantor can also be a beneficiary.
- Estate planning: A revocable trust is a critical component of estate planning. It allows the grantor to distribute assets smoothly after death, often avoiding probate.
- Probate: The legal process of validating a will. A revocable trust helps skip this process, providing quicker asset distribution to beneficiaries.
