A revocable living trust can help you protect privacy, avoid probate and protects you in case of incapacitation. But you will also have some limitations. That’s because revocable living trusts can be expensive, and they don’t have direct tax benefits. Here are the pros and cons of a revocable living trust and how you can carefully weigh them before setting one up. SmartAsset:
A financial advisor can help you with living trusts and other estate planning issues, ensuring they line up with your overall financial plan.
A revocable living trust is a document that outlines how your assets will be handled after your death. These assets can include things like bank accounts, investments or property. Because this is a living trust, you create the document while you are still alive. Then, after you die, your assets are transferred to your beneficiaries according to the terms outlined in the document.
The key difference between revocable and irrevocable trusts is that revocable trusts can be changed or canceled at any time. An irrevocable trust is much more difficult to change.
While the trust-maker is usually the trustee while they are alive, you can also name a successor trustee who will take over when the time comes. This person will receive the assets in the trust after your death.
Probate can be an expensive and time-consuming process. Fortunately, placing your assets in a revocable living trust means they won’t be subject to probate. This is because the trust remains intact after your death. This allows you, the trust-maker, to choose who should receive your assets. You can specify this and any details of how assets should be distributed when your form the trust.
Another benefit of avoiding probate is privacy protection. If your assets must go through probate, all the documents filed in court are made public records. That includes your last will and testament and the assets it contains. But when you place your assets in a revocable living trust, they aren’t subject to probate, which means they won’t be made public record.
Aging is a part of life, but people can sometimes become chronically ill or disabled, making it difficult for them to act on their own behalf. When this happens, it can result in guardianship or conservatorship that takes control of your assets. A revocable living trust allows you to instead select a successor trustee who assumes control of your assets should you become incapacitated. It also allows you to outline how assets should be administered.
In some cases, a revocable living trust may be useful for the purpose of separating assets. For example, you might have a property with significant value from before the time when you were married. If you live in a community property state, a revocable living trust can help you separate your assets from communal assets.
Creating a revocable living trust can take more time and more than writing a will because it requires a lot of work upfront. For instance, you must re-title all assets you want to transfer to the trust. Any assets you don’t re-title may be subject to probate. There may be exceptions, however, like retirement plans, insurance policies, and annuities.
In addition to re-titling assets, you must contact your bank and any relevant entities that hold your assets. This is because all the accounts you want to be owned by the trust must also be updated. As mentioned, this can be a long and expensive process, so it’s not always a good idea unless your estate is complex.
While revocable living trusts do provide some asset protection as mentioned earlier, they don’t have direct tax benefits. This is because you still retain control of the assets while you are alive, and any income on those assets passes through you. This is different from an irrevocable trust, wherein you completely give up control over your assets. But because you still retain control while you are alive with a revocable living trust, income is reported and taxed on your personal tax return.
This is another area where revocable living trusts provide less protection than irrevocable trusts. Again, because you still retain some control over your assets, they won’t be completely protected against creditors.
A revocable living trust is a document that allows you to outline who will receive your assets after you die and how those assets should be distributed. Revocable living trusts have a few key benefits, like avoiding probate, privacy protection and protection in the case of incapacitation. However, revocable living trusts can be expensive, don’t have direct tax benefits, and don’t protect against creditors. Carefully weigh these pros and cons against your situation before deciding to set up a revocable living trust.
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