Revocable Trust

A trust is an estate planning tool created by an individual to manage his assets prior to his death, and to specify how is assets are to be distributed after his death. The individual creating the trust, called a “Trustor,” or “Grantor,” transfers ownership of property and assets into the trust for the benefit of his heirs or other named beneficiaries. A revocable trust is one that can be changed, amended, or even revoked (terminated) by the Trustor at any time before his death. This may include such changes as adding or removing assets, adding or removing beneficiaries, and changing Trustee. To explore this concept, consider the following revocable trust definition.

Definition of Revocable Trust

Noun

1. A trust created by an individual that may be revoked, altered, or amended by the Trustor during his lifetime.

What is a Revocable Trust

A revocable trust not only allows an individual to specify who will receive his assets after death, it can provide a method of managing those assets while the Trustor is still living. Most living trusts are revocable by default, allowing the Trustor to make changes as his circumstances or desires change. A revocable trust avoids going through the probate process, making it possible for the Trustor’s assets to be distributed according to his instructions in the trust immediately after his death.

Revocable Living Trust

A revocable is created and funded during the Trustor’s lifetime, but the terms of the trust may not go into effect until the Trustor’s death. The term “revocable living trust” refers to a revocable trust that goes into effect while the Trustor is still living. Because the Trustor maintains control over all of the assets in a revocable living trust, such a trust does not avoid estate taxes, which become due when the assets are transferred to his heirs or beneficiaries after his death. A Trustor may, if he likes, name himself as Trustee, to manage the trust during his lifetime, with a successor Trustee to take over the responsibilities after his death.

Joint Revocable Trust

A joint revocable trust is a single living trust created by a married couple together. The couple’s assets are transferred into ownership of the trust and managed by a Trustee. A joint revocable trust specifies that, while both spouses are living, the assets, income, and principal of the trust are payable to one or both of spouses as they choose. When one spouse passes away, the trust remains in effect to the benefit of the surviving spouse. Depending on the value of the estate upon the first spouse’s death, there may be federal estate tax consequences at this time. Once the second spouse dies, the assets of the joint revocable trust are distributed to the couple’s named beneficiaries.

For example:

Helen and Harold set up a joint revocable trust for the benefit of their three children. The couple transfers ownership of their assets, including their home, two cars, vacation property, and savings and investment accounts into the trust, naming themselves as co-trustees. Fifteen years later, Helen passes away and, because she is no longer able to make decisions regarding the trust, it becomes irrevocable. Harold continues to manage the trust, and to use the assets, including living in the family home. When Harold passes away eight years later, the successor trustee takes over management of the trust, distributing the assets to the couple’s children as directed in the terms of the trust.

Revocable vs. Irrevocable Trust

Establishing any type of trust begins by setting up a living, or “inter vivos,” trust, which goes into effect during the individual’s lifetime. The decision must then be made whether or not the Trustor wants to be able to make changes to the trust. While a revocable trust offers flexibility, allowing the Trustor to add or remove assets, or change any of the trust’s terms he likes at any time.

By contrast, an irrevocable trust is a rigid estate planning tool that offers a number of financial benefits not provided by a revocable trust. The primary reasons for establishing a revocable trust include income and estate tax consequences. Assets placed in an irrevocable trust become property of the trust permanently. For all intents and purposes, those assets no longer belong to the Trustor, but to the trust, to be managed by a Trustee. While a Trustor may choose to name himself as Trustee of a revocable trust, he cannot do so with an irrevocable trust.

This permanent removal of assets from the Trustor’s ownership and control, even if he is allowed to use them, means that they do not exist in the Trustor’s estate when he dies. This can result in the estate totaling less than the federal estate exemption, eliminating estate taxes altogether on the Trustor’s death. Another potential perk of moving assets into an irrevocable trust is to eliminate income taxes payable by the Trustor on income earned by those assets. Such income tax would be payable by the trust itself, which impacts the beneficiaries. Because an irrevocable trust has many complex financial implications, anyone considering using such an estate planning tool should consult an experienced estate planning attorney, tax professional, or other wealth management professional.

Related Legal Terms and Issues

• Assets – Property or finances owned by an individual or entity, and regarded as having value.
• Beneficiary – A person designated as the recipient of property or other assets as specified in a will, trust, or insurance policy.
• Codicil – A supplement to an existing Will, containing an addition, modification, or explanation of something in the Will.
• Estate Planning – The process by which an individual arranges transfer or management of his assets in anticipation of death.
• Heir – A person who, by right of inheritance, inherits the assets of a deceased person.
• Probate – The court process by which a Will is proved valid or invalid.
• Trustee – A person or entity nominated to mange assets set aside to benefit another person.