Revocable living trusts are one of the most common forms of trusts that people put in place to protect their assets upon death. Here’s what you need to know about how they work, the pros and cons, and how to set one up.
What is a revocable living trust?
Think of a revocable living trust as a legal holding tank for your assets: You (the grantor) put anything you want in the tank, earmarking it for exactly how you want it given to your heirs (or beneficiaries) once you die. But, as the word revocable suggests, you can also take anything out of the tank at any time (as long as you’re of sound mind). The word living refers to the fact that these trusts are established while you’re alive, unlike other types (such as testamentary trusts) that are established upon death.
Most people name themselves as the trustee of their trust—that’s the person who manages the trust and its assets. They usually also name a second trustee (or “successor trustee”) who will take over upon their death and transfer assets to beneficiaries according to the deceased’s wishes. (A successor trustee can also step up if you’re no longer able to manage your own affairs—if you were to become mentally incapacitated due to dementia, for example.)
What are the benefits of a revocable living trust?
One of the key perks of a revocable trust, as opposed to an irrevocable trust, is that you retain maximum control of your assets while you’re alive and of sound mind. You can change the terms of your trust and what your beneficiaries receive whenever you want. You can reclaim assets, reallocate assets, add more assets, or sell assets as you choose. It’s entirely within your control.
That flexibility also extends to how assets are distributed: You can decide to give your kids the bulk of their inheritance on their 25th birthday, or spread it out over five-year periods, or earmark the funds only for a down payment on a home. But if you change your mind, updating your wishes is as simple as updating the trust management documents.
Another bonus: The whole process of distributing assets happens outside of probate (which is a legal process that’s required even if you have a will in place) and keeps your assets private and off the public record upon your death.
What are the potential drawbacks?
Because you’re able to revoke the trust at any time, the assets contained in your trust are still considered part of your estate. Including them in the tally of your estate could raise your tax liability when it comes to federal estate taxes and, depending on where you live, state estate and inheritance taxes. Assets in a revocable living trust also are “countable” when it comes to Medicaid eligibility.
How do you set one up?
Setting up a revocable living trust will likely cost around $1,500, as you work with an estate attorney to establish and fund the trust. That may sound like a lot, but most experts advise against a DIY approach, as it can lead to some costly mistakes. An experienced attorney can help you think through things like how long the trust should last, who your successor trustee should be, and how to go about actually transferring assets to the trust, among other details. You can browse estate attorneys in your area with our service finder:
What fine print should you watch out for?
If your trust includes any investment vehicles or sources of income, those gains will be reported under your Social Security number, and you’ll have to include them on your income tax return. You can report that income on your personal Form 1040 (unlike an irrevocable living trust, which requires a separate tax return).
By Kate Rockwood
