Last week I went over irrevocable trusts and their advantages and disadvantages. This week, I thought I would go into a little more detail on Revocable trusts and the pros and cons of that estate planning tool.
You may often hear financial planners and other professionals singing the praises of Revocable Trusts and their benefits. While Revocable Trusts are excellent estate planning tools, they are not suitable for everyone. So, read on if you would like to learn more.
First, let’s refresh our knowledge on trusts. A trust is just a contract that divides property ownership between the legal owners of the property and the beneficial owners of the property. The trust agreement will assign legal ownership of the property to the trustee and beneficial ownership to a beneficiary. As the property owner, the trustee manages the property, pays taxes, and handles other business related to it. The beneficial owner, let’s say a settlor’s child, can live on the property and enjoy the benefits the land offers.
This way, the property is managed by someone else while another person lives there. The trustee is the fiduciary for the beneficiary and must act in their best interest. Since the beneficiary does not own the property, they cannot sell it, take a loan out on it, and can’t make the trustee take action with the trust property. Most importantly, the property is unreachable by the beneficiary’s creditors if it is in the trust. So, at its core, no matter the purpose of the trust, the essential goal is to give someone the benefits of the property without giving them legal ownership and control over the property.
I hope that is clear, but that is the basic idea behind a trust.
So, what is a Revocable Trust? A revocable trust is a living trust created while the settlor is alive. As the name implies, the revocable trust allows the settlor to make changes to the trust during their life. The settlor may amend or even revoke the trust. Upon the death of the settlor, the trust becomes irrevocable and cannot be amended or revoked.
Benefits of the Revocable Trust
- Avoids Probate
Probate is the legal process of winding up a decedent’s estate. Any property considered non-probate property must go through the probate process. To read specifics of the probate process, you can read my previous article. It can be a costly and time-consuming process.
Some people think avoiding probate is the most crucial element of an Estate Plan. While I do believe it is important for some, it certainly should not be your end goal. If you do wish to avoid probate, a revocable trust is an excellent way to do it. Any property within the trust is not subject to probate proceedings. However, frequently, people forget to place their property into the trust. If there is specific property outside the trust, the estate will have to go through probate.
- Flexibility
Revocable trusts allow settlors to give their beneficiaries the benefits of property ownership without giving up ultimate control of the property. The trust can be changed or revoked at any time, so if something comes up, the grantor can amend the document and follow the new processes outlined in the trust.
Finally, companies can manage the trust and manage your property at death. This helps avoid family problems that can occur when handling the estate assets upon death.
- Management of Property in Case of Disability
Most people will have a period of disability before their death. Asset management in this period is important. Without a Revocable Trust, a power of attorney may be used. Suppose you do not have a power of attorney or a revocable trust? In that case, an expensive court proceeding may be required to access your assets.
If you are incapacitated, a revocable trust offers a formal method of managing assets. Banks prefer to follow a trust document rather than any power of attorney forms. Additionally, it helps avoid disagreements among family members during stressful life events.
Disadvantages of a Revocable Trust.
- Cost
There are costs in setting up a revocable trust. Attorney fees, re-titling property, taxes, and administrative costs can add up. This is an important consideration in evaluating if a revocable trust is right for you.
- No Tax Savings
Unlike an irrevocable trust, there are no real tax advantages. These trusts do not save on income tax or estate taxes. All the property is counted at death as if it is the settlor’s property.
- No Asset Protection
During the settlor’s lifetime, the settlor’s creditors may still reach the assets of a revocable trust. It is even possible for creditors to get the assets at death, even when the trust has become irrevocable.
However, keep in mind that the trust assets are not reachable by the creditors of the beneficiaries. That’s because they have no legal ownership of the property.
Summing it up: Revocable Trusts
Creating a revocable trust can be an excellent way to manage your estate. It allows people to control their assets while still giving the benefits of those assets to their heirs. Even if an issue comes up, the settlor can easily amend the trust to meet the changing circumstances of your life. It can help avoid probate and provide peace of mind during a time of disability. However, it is important to remember that this is not the right estate planning tool for everybody. They do not have unlimited power to avoid taxes and perform other miracles.
While your financial advisor may know a lot about managing your investments, it’s probably a good idea to speak with an estate planning attorney. If you’d like to talk to an attorney at Nobleheart Legal, please call or email us via the contact form.
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