What is a revocable trust, and what are the benefits of using one?

Jose A Reynoso, Senior Managing Director, Head of Advanced Tax and Estate Planning and Personal Financial Planning | Citizens Private Wealth

Jose is a strategic partner who is leads a national team of professionals that deliver a comprehensive suite of advisory solutions working with individuals, families, and family offices as financial, tax, estate and investment planners.

When it comes to estate planning, many people know the importance of having a will. It's one way to ensure your intentions for distributing your assets and taking care of your loved ones are carried out after you pass away.

Certain situations, however, may warrant an additional estate planning tool — a revocable trust.

A revocable trust can make sense if you have substantial assets or special circumstances where you'd like more control over what happens to your property.

A revocable trust is a type of trust. Trusts hold property on behalf of one or more people. For example, you could create a trust fund that spreads out an inheritance over many years for your grandchildren rather than giving them everything at once through a will.

You can amend or terminate a revocable trust while you're alive. That is, you can take back your money and property if needed. A revocable trust is often called an inter-vivos trust (or "living trust") because it's created during your living years. Certain other trust funds are created only after death.

Assets that can and can't go into a trust

You can transfer cash and most assets into a revocable trust. Real estate, bank accounts, brokerage accounts and valuable personal property like jewelry, artwork and valuable collectibles are all possibilities.

However, some assets aren't appropriate for placing in a revocable trust while you're alive. It wouldn't be useful, for example, to put a health savings account into a revocable trust since you'd want to be able to access it to pay for qualified medical expenses. Life insurance policies already pay benefits directly to the listed beneficiary therefore there may not be an obvious reason to name a revocable trust. (However, in some specific planning instances changing the beneficiary designation of a life insurance policy may be appropriate.) And accounts created under the Uniform Gifts and Uniform Transfers to Minors Act are, by nature, irrevocably owned by the minor they benefit, so they cannot be moved to a revocable trust you control. (Irrevocable trusts for children are generally a good alternative to UTMA accounts.)

You also generally want to avoid transferring your retirement accounts, like a 401(k) or an IRA. Significant thought should be given before consider changing the beneficiary designation of a qualified account to a trust. It can be unnecessarily complicated to place certain personal property (e.g. cars) into a revocable trust — unless the property is a particularly valuable collectible or there are other planning objectives.

Main parties of a revocable trust

A revocable trust has three main parties: a grantor, a beneficiary, and a trustee.

• Grantor. The person who creates the revocable trust fund and transfers property into it.
• Beneficiary. The person who enjoys the benefit of the property in the revocable trust. You could name one or more people or organizations as beneficiaries.
• Trustee. The person (i.e., the fiduciary) who manages the assets and investments in the revocable trust and files any necessary tax returns.

The roles of a revocable trust are not set in stone. You can generally change or add beneficiaries at any time. You can also switch trustees. Many grantors start out in the trustee role but later decide to switch to a family member, a trusted professional, or a corporate fiduciary.

Ownership of assets in a revocable trust

You, as the grantor, own the property in a revocable trust. As long as you're alive, whatever you place in a revocable trust does not have to stay there permanently. You could get the money and property back if you need it during your lifetime.

When you pass away, your revocable trust becomes irrevocable. That means it's no longer possible for you or your estate to cancel the trust or take out the assets whenever they want.

Instead, you will have named a trustee to take over the trust upon your death. This person will manage the trust's assets according to the instructions you've laid out in the trust's governing document.

For example, you may have stated that the trust's beneficiaries should receive a portion of the trust's value as annual income or that assets will be released to them after they reach a certain age or milestone. The trustee will abide by that and manage the assets on behalf of the beneficiaries until assets are distributed to them.

A revocable trust is an effective estate planning tool for many reasons. Some of the main benefits include:

Avoiding probate

Probate is the legal court process of reviewing a person's will and distributing their assets to heirs. It can be expensive and time-consuming and could significantly delay when your heirs receive the inheritance.

It's also a public process that makes the details of the estate visible to family, friends, and the general public, limiting privacy and providing the opportunity for unhappy family members to challenge the will. With a revocable trust, you can ensure confidentiality and a faster, less expensive process of distributing assets.

Financial flexibility

You can name yourself the trustee, thereby maintaining control over the trust assets. You also have the freedom to move assets in and out of the trust by retitling them — with no income or estate tax implications. This allows you to use assets from the trust — at any time — to fund your expenses.

Financial protection

A revocable trust offers financial protection in case of diminished legal capacity. For example, if you became ill and could not manage your financial affairs, you could assign a co-trustee, such as a spouse or adult child, to pay bills and direct the trust's assets.

Complements a will

A revocable trust is not a replacement for a will. Rather, it works in conjunction with your will and ancillary documents. A will is still required to direct the distribution of personal assets of value that have not been included in the revocable trust, such as your personal bank accounts, furniture and other belongings.

While a revocable trust remains changeable while you're alive, you cannot change or revoke an irrevocable trust. After you transfer property, assets, or money to an irrevocable trust, you cannot take it back, even as the grantor.

If you're certain about transferring ownership of the assets, using an irrevocable trust may make more sense than a revocable trust. One consideration is that assets in a revocable trust are considered part of your taxable estate. Another is that if you have financial liabilities after you pass away, creditors may be able to go after the assets you put in a revocable trust. Neither is the case for assets in irrevocable trusts as you've given up ownership of them.

A revocable trust can be a valuable part of your estate plan. They can speed up the distribution of your assets to your loved ones, giving you more control over when they receive the assets after you pass away. And with a revocable trust, you can keep access to your property while you're alive.

But to be an effective estate planning tool, revocable trusts should be set up and managed properly.

If you're considering creating or updating a revocable trust, Citizens Private Wealth can help by connecting you with the right advisor to protect your legacy. Click below to request a call today.

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