What Is a Revocable Trust?

What Is a Revocable Trust?

Let me explain what a revocable trust is—it's a living trust you create and fund with your assets, and as the grantor, you can change or completely cancel it anytime while you're alive. The income from those assets goes to you until you pass away, and only then do the assets transfer to your beneficiaries. This setup gives you flexibility and keeps providing income during your life, making it a solid tool for estate planning.

How a Revocable Trust Works

You set up a revocable trust to handle your assets as you get older, and you can amend or revoke it if your situation changes. Remember, the assets in it count toward your estate for tax purposes. You might appoint a trustee to manage things, or you can act as trustee yourself, naming a successor to take over after you die and distribute everything to beneficiaries. This is different from an irrevocable trust, which you can't touch once it's set. The trust's principal—the money or property—can fluctuate with expenses or market changes, and the whole thing is called the trust fund. Since the trust doesn't 'die,' it skips probate, that court process for wills.

Advantages and Disadvantages of a Revocable Trust

There are clear upsides to a revocable trust. If you face health issues as you age, your chosen successor can step in to manage the assets. It avoids extra probate for out-of-state real estate if you include it in the trust. For minor beneficiaries, it holds assets without needing a court-appointed guardian, and you can set it up to dole out money gradually if you're worried about how they'll handle it. These trusts are straightforward for taxes—they're ignored for income tax, so you just report everything on your personal return.

On the downside, setting one up takes time and effort; you have to retitle assets into the trust's name to skip probate. You need to review your estate plan yearly to keep it on track. Costs are higher than simpler options, there's no estate tax break, and not all your assets might end up in it, so you'll likely need a will for the rest, which would go through probate. Plus, creditors can still access the assets while you're alive.

What Is a Revocable Living Trust?

A revocable living trust is just a trust you create while alive that you can change or revoke. People use it in estate planning to dodge probate and family disputes over assets, but it doesn't give you tax shelters or shield from creditors like an irrevocable one does.

Which Is Better: A Revocable Trust or an Irrevocable Trust?

It depends on your goals—revocable trusts let you undo them if needed, while irrevocable ones are locked in once set up, becoming a separate entity that owns the assets. With irrevocable trusts, you lose control, but you gain tax benefits and creditor protection, making them ideal for high-value assets that might trigger gift or estate taxes.

What Happens to a Revocable Trust When the Grantor Dies?

When you die as the grantor, the revocable trust turns irrevocable automatically, and the successor trustee handles distributing the assets.

Can You Get Deposit Insurance on a Trust Account?

Yes, trust accounts can be insured by the FDIC. Starting April 1, 2024, new rules treat revocable and irrevocable trusts the same under 'trust accounts,' insuring up to $250,000 per beneficiary per bank, up to five beneficiaries for a max of $1.25 million. Eligible beneficiaries include living people, charities, or IRS-recognized nonprofits, and it's based on primary beneficiaries.

The Bottom Line

In summary, a revocable trust lets you manage your assets during your life and protects you if you get ill or disabled. Unlike an irrevocable trust, you can change or end it anytime if you're mentally sound. It helps your heirs skip probate, but it doesn't dodge estate taxes.