So, what is a revocable trust? A revocable trust is a legal entity that is created to hold assets. The revocable trust could act as a self-defense tool to direct the use of assets should the creator of the trust become incapacitated. Parents can also use revocable trusts to hold assets for the benefit of their children.
The revocable trust can have particular rules, so that the wishes of the parents are strictly met. Generally, the main alternative to a revocable trust is an irrevocable trust. This article will cover the main advantages and disadvantages of revocable trusts. It will help readers understand what is a revocable trust.
The Concept of a Revocable Trust
The way that a revocable trust works is that a person (the grantor or trustmaker) creates a trust. There is another person or the same person that functions as the trustee. The trustee is the person who manages the trust and carries out the terms of the trust.
Another person that needs to be named in the trust is the successor or back-up trustee. If the original trustee dies or is incapacitated, the successor will take over the responsibilities of the trust. The final person that needs to be named in a revocable trust is the beneficiary.
The beneficiary is the person who will be receiving the benefits from the trust. The trustee must manage the trust in the best interest of the beneficiary. At the death of the grantor, the grantor generally declares whether the assets transfer over to the beneficiary, or if the assets transfer to benefit a different person or entity.
Advantages and Disadvantages of a Revocable Trust
There are both advantages and disadvantages in using a revocable trust. In particular situations, a revocable trust can be the best choice; in other situations, the irrevocable trust can be the best choice. A family deciding on a particular type of trust to use should analyze and research their particular situation.
This Beginner’s Guide to Trusts by the University of Florida has samples of both a revocable and irrevocable trusts. After reading it, you will be able to understand what is a revocable trust agreement. You will also understand more about what is a revocable trust in comparison to other types of trusts.
Advantages of a Revocable Trust
One of the main advantages of a revocable trust is its flexibility. The revocable trust allows the grantor the flexibility to change the terms of the trust or end the trust entirely. The fact that a successor is named means that there will be a clear transfer of control of the assets in the case of the trustee becoming incapacitated.
Another advantage of the revocable trust is that probate can generally be avoided. Probate avoidance usually means an estate can avoid probate, taxes, and other complications. To offer an estimate of how expensive probate can be, state’s executor fees are generally in the range of 2% to 5%. For any investments such as real estate or stock ownership, there will not need to be a delay in managing the assets, as there could be with just a simple will. This Comparison of Living Trusts and Wills explains what is a revocable trust compared to a will.
An additional advantage of a revocable trust is that the details of a revocable trust are private. If an individual uses a will, the details will become public record, and any individual with an interest can learn about a family’s private financial information.
Disadvantages of a Revocable Trust
A disadvantage of a revocable trusts is that property needs to be registered in the name of the trust. There can also be filing fees associated with registering.
Another disadvantage is that there is legal cost in the original creation of the revocable trust. An attorney must prepare all of the trust documents. The attorney will also arrange the transfer of assets to the trustee. The attorney fees to prepare the trust document and transfer the assets can amount to many thousands of dollars.
Transferring assets to the trustee can also be difficult and expensive. Such needs include transferring stock certificates, preparing deeds, giving contractual interests to the trustee, and changing registrations on bank accounts, certificates of deposits, and brokerage accounts.
An additional disadvantage of a revocable trust is that any minor changes to the terms of the revocable trust need to be legally changed. Legal changes may require the help of an attorney, and could lead to additional legal fees.
However, this disadvantage could work as an advantage in some cases. The strict legal interpretation of the revocable trust ensures that there will not be ways to disregard the original intentions of the grantor.
Compared to an irrevocable trust, the revocable trust does not help in reducing the size of the grantor’s estate for federal and state taxes. The grantor still has full control of the assets. This is because the grantor can change the revocable trust at any time. An additional negative consequence of the grantor having full control is that assets in the revocable trust might not be shielded if the grantor has debts or other legal issues.
Overall, there are instances when a revocable trust would be a good tool in financial planning. However, there are also instances when an irrevocable trust would be a better tool. There are also instances when the expense of setting up any sort of trust outweighs the benefit. We hope that now you have a better understanding of what is a revocable trust. If you have any questions, do not hesitate to ask us!