Do You Understand Revocable Living Trusts?

There are good reasons why Revocable Trusts have become one of the primary mechanisms for estate planning.  Some people incorrectly assume they don’t need a Trust because they think a Will is enough, or they’ve been told a Trust is only for very wealthy people, or they think they can do their own estate plan using transfer on death and beneficiary designations. 

To begin to understand why Revocable Trusts are so helpful in estate planning, it’s important to first know (1) What is a Revocable Trust, (2) Key Benefits of a Revocable Trust, and (3) Common Misconceptions about Revocable Trusts.

What is a Revocable Trust?

A Revocable Trust is a common estate planning tool that allows individuals to manage and control assets during their lifetime while also providing a plan and functional mechanism for handling final affairs and distributing assets after death.

A Revocable Trust involves three primary roles:

• Grantor: The person who creates the Trust and transfers property to the Trust.
• Trustee: The person responsible for managing the property held by the Trust.
• Beneficiaries: The individuals and/or organizations that benefit from the Trust.

A standard Revocable Trust typically has three phases:

Phase One - During the Grantor’s Lifetime: In a typical Revocable Trust, the Grantor is also the Trustee and the beneficiary.  This allows them to retain control and use of any property transferred to the Trust during their lifetime.  The Grantor reserves the right to amend or revoke the Trust during their lifetime, so if they change their mind about who should be the Trustee and/or beneficiaries after they die, they can amend the document.

Phase Two - At the Grantor’s Death: When the Grantor/Trustee/beneficiary dies, the Trust goes into an administrative phase in which the person the Grantor designated as successor Trustee can handle the administrative affairs of the deceased Grantor.  This often includes paying bills (such as last illness and funeral expenses), filing final tax returns, and liquidating assets.

Phase Three - Distribution: After all of the final affairs have been handled and the assets have been converted into a form that can be distributed, the successor Trustee distributes the assets as directed by the terms of the Trust Agreement.

Key Benefits of a Revocable Trust

Probate Avoidance – We spend our lives trying to avoid court, but using only a Will for estate planning all but guarantees your kids will have to go to court to settle your affairs.  However, a Revocable Trust typically avoids court involvement if you fund the trust during your lifetime.  

Flexibility – Unlike many other estate planning tools, a Revocable Trust can (and should) address almost unlimited circumstances that simply cannot all be addressed using exclusively transfer on death or beneficiary designations.

Efficiency – Probate can take months just to open, and sometimes years to complete.  With a Revocable Trust, in most cases the successor Trustee can almost immediately gain access to assets and begin handling the affairs.

Privacy – Unlike probate, a Revocable Trust administration is generally not a public record, so the details of a person’s assets and estate plan are not available to the public.

Common Misconceptions about Revocable Trusts

Revocable Trusts do not shield Trust assets from Grantor creditors or help individuals qualify for Title XIX benefits (Medicaid).  Since a Grantor retains ownership and control over their Trust, assets held in Trust are generally treated as owned by the Grantor and available to creditors.  Similarly, transferring assets to a Revocable Trust does not remove those assets from consideration for Medicaid eligibility.  Individuals concerned about asset protection and/or long-term care planning should carefully consider if additional strategies should be layered into their estate plan to align with their objectives.