Traditionally, most people have relied on a will to pass their assets on to heirs. But wills aren’t the only solution. Revocable trusts have become an increasingly popular estate planning tool.
A revocable trust, also known as a living trust, is a written document you (the “grantor” or “trustor”) create during your lifetime, which contains your instructions about caring for you if you are unable to manage your affairs (your living estate), and instructions for the distribution of your assets to your beneficiaries (your death estate). You also designate the “trustees” who will be responsible for administering your trust.
When your affairs are administered under a trust agreement, you avoid the publicity, costs and hassle of administering your estate in state probate courts. Avoiding the probate courts is especially worthwhile when you are unable to manage your own affairs.
A revocable trust, as the name suggests, can be altered or even dissolved at any point before your death, for any reason, provided that you [or your spouse] are mentally competent.
Typically, you and your spouse would name yourselves as trustees. This gives you complete control over the property in your trust while you’re alive; you can sell your assets, invest them, or do just about anything else you could do if your assets weren’t in your trust.
With the trust in place, you can rest assured that should you become incapacitated or die, your assets will be protected and you and your children cared for according to your instructions.
Revocable trusts and wills are similar in some key respects. Most importantly, both convey your instructions about who will inherit what, and who will care for dependents.
A major difference is that a will must go through the often-lengthy court process known as probate to establish that it is legally valid. Probate can cost time and money, and probate records are available to the public. A revocable trust, on the other hand, remains private in most circumstances.
Revocable trusts also allow you the flexibility to pass your assets to beneficiaries immediately following your death – or to have them portioned out over time. What’s more, a properly drafted document may help to reduce federal and state wealth transfer tax liabilities. Maybe most importantly, a well crafted trust document can help explain the “why” behind your instructions, helping to leave your heirs with insight and understanding about your wishes, and an invaluable aid to your successor trustee(s).
Be aware that online living trust “kits” have proliferated in recent years because of the allure of their low cost. Adopting a boiler-plated trust to save a few bucks is like tripping over dollar bills to pick up a few nickels, and it can lead to unintended and ugly consequences, so please consult with a qualified financial advisor and estate planning attorney.
While revocable trusts can cost thousands of dollars to set up, the financial expense generally pales in comparison to the potentially greater costs in money, time, undesirable outcomes and the emotional toll of trying to care for you and your loved ones without a well-conceived estate plan and trust document.
Also bear in mind that not everyone needs a revocable trust. Wills are simpler and less expensive, and may suffice quite nicely in the right set of circumstances.