Definition of a Revocable Living Trust
A revocable living trust, also known as a revocable trust, is a written document that outlines how your assets will be managed after your death. These assets can include real estate, valuable possessions, and financial accounts. Unlike testamentary trusts, which take effect after death, living trusts are created during your lifetime. Assets placed within the trust are then transferred to designated beneficiaries upon your death. The key feature of a revocable living trust is its flexibility, allowing you to modify or revoke its terms at any time, as indicated by the term “revocable.”
Before delving into the reasons for or against acquiring a revocable living trust, it’s essential to understand some terms related to trusts. Keep in mind that trust laws vary between states, so the specifics may differ. The person creating the trust is referred to as the trust maker, trustor, or grantor—all terms for the same individual. Typically, the trust maker also serves as the trustee, responsible for managing the trust’s operations, such as keeping records of income and taxes. An important aspect of trust documentation is appointing a successor trustee, who takes over trust management when the original trustee is unable to do so. Beneficiaries are the individuals, organizations, or entities set to receive assets from the trust after your passing.
The Process of Creating a Revocable Living Trust
When you believe a revocable living trust is appropriate for you, prepare yourself. You are going to have to do a lot of the work up-front so that the distribution of your estate is easier in the future. Begin by inventorying of your assets. Following that, consider who you want to bequeath your assets to and who you may appoint as trustee. After the the document is created, transfer any property you wish covered in the trust. For many items, you just have to list the asset. For others, you will be required to get a hold of financial institutional, insurance companies and transfer agencies to update beneficiaries, issuance of new investment documents, retitle vehicles, and sign newer deeds. You are going to also want to set up a “pour-over” will, in which adds un-funded or un-allocated assets to the trust.
Revocable Versus Irrevocable Living Trusts
When considering trusts, you’ll come across irrevocable living trusts. To distinguish between the two, let’s explore the characteristics that set them apart. A key advantage of revocable living trusts lies in their revocability. This means you have the flexibility to modify or nullify the trust at your discretion. You retain control as the trustee, making decisions as you see fit. In contrast, irrevocable living trusts cannot be altered or dissolved without unanimous approval from all appointed individuals. To remove a beneficiary from an irrevocable trust, the beneficiary’s consent and signature are mandatory. This inflexibility stems from the fact that, upon creating an irrevocable trust, the trust maker forfeits ownership rights to the assets.
Another significant difference pertains to taxes. Assets in revocable trusts remain yours, subject to your taxes, including income, inheritance, and estate taxes. Irrevocable trusts, however, own the assets, and taxes applicable to the trust itself must be paid. It’s worth noting that, upon the trust maker’s death, a revocable trust becomes irrevocable, losing the ability to be altered.
Smith, L. (2021, January 20). Revocable living trusts: What they are and how they work. Retrieved May 04, 2021, from https://smartasset.com/retirement/what-is-a-revocable-living-trust
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