Estate planning is never fun, nor is it particularly enjoyable to imagine what might happen to your estate after death. However, planning your estate is crucial, particularly if you want to ensure that your assets go to the people you intend with a minimum of fuss or delay.
Even if you aren’t extremely wealthy (and most of us aren’t), you should still understand the difference between different trusts and estate transfer instruments so you can choose the best one for your will and goals. This article will break down revocable trusts and explore their unique advantages and disadvantages. By the end, you’ll know whether a revocable trust is a good choice for your estate planning.
What is a Revocable Trust?
Put simply, a revocable trust (also called a living will) is a type of trust in which the provisions can be canceled or otherwise altered if deemed necessary by the grantor (the creator of the trust – you). Aside from this flexibility, a revocable trust also allows any income earned by assets within it to be distributed to the grantor before death. Only after death is income or other property transferred to trust beneficiaries.
Revocable Trust vs. Irrevocable Trust
An irrevocable trust is the opposite of a revocable trust: it cannot be altered or revoked after it is implemented, so its creator is stuck with whatever they decided even if they need income or the assets under the trust during their lifetime.
The key difference between a revocable and irrevocable trust is that the former allows for versatility and flexibility while the latter is more rigid. This is particularly important for real estate assets, which are a key factor to consider when you determine how your estate or assets should be distributed to your beneficiaries. For example, a revocable trust may allow you to continue using income from a property while you are still alive, thus staying comfortable throughout your golden years. You can still give the property in question to a beneficiary after your death, however.
Revocable Trust vs. Will
A will is an overall simpler estate instrument. It’s straightforward to draw up a will, and you don’t need to manage it continually. Instead, you just write the will, and someone reads it after your death to determine who gets what out of your estate. However, a living trust allows you to manage your finances throughout your life, and a will doesn’t offer the same kind of protection as a revocable trust. Furthermore, wills don’t let you spread out your distribution of assets. Wills are public for anyone to read and are ultimately less ironclad or “legally binding” instruments than any living trust. While both revocable trusts and wills have their differences, you should consider setting up both. The more clarification you can offer regarding your assets and their distribution after death, the better.
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Advantages of Revocable Trusts
So, why would you consider a revocable trust? There are several major advantages they can provide to your estate and your beneficiaries after your death.
Avoid conservatorship: A revocable trust stops you from having to go to court to control your finances if you become physically or mentally incapacitated and are unable to control your estate as you were before. With a revocable trust, your successor trustee can manage the trust and its assets if you are incapacitated.
Increased flexibility: As mentioned, the primary benefit of a revocable trust is that it lets you change things in its provisions or even outright cancel the trust if necessary. You’ll also benefit from income earned from your assets while you are still alive.
No probate court necessary: Probate court can be a very long and frustrating process for many families. Unfortunately, it’s also necessary if you don’t have a trust to safeguard your assets and determine distribution rights ahead of time. This can result in your beneficiaries not receiving their assets or funds as you have determined for months or even years after your death.
Disadvantages of Revocable Trusts
Although a revocable trust can be a good idea, a revocable trust also comes with several potential disadvantages you should keep in mind.
No tax benefits: For starters, a revocable trust is not a tax shelter, so you don’t get any tax benefits from these instruments. Additionally, your IRA or any other qualified retirement accounts can’t be placed into the trust, so you have to plan for these accounts separately.
Retitling process: If you want to place assets in a revocable trust, you have to retitle them, which is very time-consuming (particularly if you have a lot of assets to retitle, like multiple homes or properties).
Contest period: Lastly, if you have multiple heirs who may contest your will, your home state will set a contest time period that can last for well over three months, which can also slow down the asset distribution process.
How to Set Up a Revocable Trust
If you decide to go with a revocable trust, you can do so relatively simply. There are two stages involved in creating a revocable trust: creating the trust agreement, then funding it and deciding who the trustee will be. When you create the trust, you’ll need to identify your beneficiaries, your trustee(s), and determine which income or assets you want to place in the trust. All of this can be very complex and time-consuming. You’ll also need to pay to set the trust up. Note that if a lawyer sets up your trust, you’ll need between $1000 and $7000 on average to handle all the paperwork. The entire process can take up to a couple of weeks or longer.
Should You Set a Revocable Trust?
Ultimately, you should investigate all the different types of trusts and estate planning vehicles you can use before deciding on a revocable trust. After all, your assets and estates are unique, so you’ll want to pick the best trust for your specific needs. That said, a revocable trust could be a good idea if:
You want to be able to change instructions or assets in the future
You want your beneficiaries to avoid probate court or conservatorship proceedings
You want to make sure you can continue benefiting from income and trust assets until your death
A revocable trust is a versatile and effective estate planning instrument you can and should consider if you want maximum flexibility with your estate until your death. They can help you avoid conservatorship and probate court, but there are also tax implications to consider. You should consider your options carefully before deciding on any type of trust.
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