A Trust is an estate planning tool used to hand over ownership of property and assets so that they can be managed for the benefit of another. In legal terms, this is called a fiduciary agreement because you are trusting another entity to manage the Trust for you. The key reason individuals set up Trusts is to move property out of their estate and thus outside of the probate process. There are many different types of Trusts to choose from, making them tricky to navigate at times.
Today, we are here to clear up the difference between the Living Trust vs. Revocable Trust, and the common misconception that they are the same. Although they are closely related, there are some key distinctions that you should know about. Keep reading to get the answer once and for all so that you can choose your Trust from an informed place.
What is a Living Trust?
A Living Trust is a legal document that allows you to arrange how your property will be distributed after your passing. Similar to a Will, you can decide who will inherit that property, including loved ones and organizations that you want to support.
Unlike a Will, a Living Trust is the legal owner of any property and assets you fund it with. This property does not have to go through the probate process because you’ve moved it out of your personal estate and into the Trust. You still get to maintain control of this property during your lifetime.
After you pass away, your successor Trustee is responsible for managing these assets on your behalf. They can continue to manage these gifts indefinitely until it is time to distribute them. For instance, you may not want your minor children receiving their inheritances until they become adults. Having control over the timeline of distribution in this way can be beneficial.
What is a Revocable Trust?
A Revocable Trust is typically set up such that the Grantor (the person who sets up the Trust) can maintain control and access to the assets placed into the Trust during their lifetime. In many cases, states allow the Grantor to name themselves as the Trustee so that they can manage and access their Trust funds and property directly. However, in this case, they should be careful to appoint a Successor Trustee or Co-Trustee in the case of their death or incapacitation.
Aside from control and rights to the Trust during their lifetime, the Grantor also retains the right to change or revoke the Trust at any time. This is a distinguishing function because there are types of Trusts that go into effect post posthumously and cannot be changed or revoked once they are set up. This latter type of Trust is called an Irrevocable Trust.
Find out more about Revocable vs. Irrevocable Trusts here.
What About a Revocable Living Trust?
Now, we often get the question, “is a Living Trust the same as a Revocable Trust?” The way this question is framed indicates that they are often referred to and conceived as to different types of Trusts.
Here is a moment of clarification: a Living Trust is a Revocable Trust. In other words, it would be correct to call it a Revocable Living Trust. It is also correct to call it a Revocable Trust or a Living Trust; they all have the same meaning.
There are many different types of Trusts available at your disposal, with each providing different levels of control, protection, and outcomes. Each type of Trusts falls into one of two categories: irrevocable or revocable.
These two categories simply indicate where the type of Trust in question can be changed, updated, and revoked (revocable)— or not at all (irrevocable).
Irrevocable Trusts are rigid and cannot be changed or revoked. Once you set it up, it is set in stone. You may be wondering why anyone would choose an Irrevocable Trust when a more flexible option is available. That’s because this type of Trust offers certain benefits, such as better tax benefits and stronger asset protection.
Revocable Trusts are a great fit for individuals who want flexibility and aren’t certain about what might happen in the future. If we’re being proactive, we’re setting up our Trusts relatively early in life. (At least, that is our hope.) Life is long, adventurous, and oftentimes unpredictable. This means that it is only expected and natural to need to change the terms of our Trust from time to time. Further, we would naturally want to maintain access and control over our own property and assets until we’re ready to pass them on to loved ones.
This is why a Revocable Living Trust is an extremely popular estate planning tool. It’s a Trust that you can set up and fund, while maintaining access and control over your own assets during your lifetime. It also allows you to protect your assets and pass them on to loved ones after your death. Finally, you retain the right to make changes or revoke it completely at any time during your life. (Note, however, that Revocable Trusts automatically turn into Irrevocable Trusts upon your passing. This makes sense because we would not want anyone tampering with the terms of the Trust when we are no longer around to provide our authorization.)
Advantages of a Revocable Living Trust
In the section above, we explained why Revocable Living Trusts are a popular estate planning option, including control and flexibility.
Here are the advantages of Revocable Living Trusts that you should know about:
Bypasses the probate process
Keeps your property and assets out of public record
Saves your family money in the long run by protecting assets from certain taxes and probate costs
Serves as a holding place of assets and property for minor children
Disadvantages of a Revocable Living Trust
While a Revocable Living Trust can be a wonderful tool for your Estate Plan, there are also some drawbacks to consider. Here are several disadvantages associated with using a Revocable Living Trust:
More costly and complex to set up relative to a Will
Must re-register property and assets in the Trust’s name
Does not exempt your estate from income taxes or estate taxes
Contestable by anyone in your family who isn’t happy with the terms of the Trust
Creditors can still go after a Revocable Living Trust
Do I Need a Revocable Living Trust?
One of the many amazing aspects of estate planning is that you do not necessarily have to make the tough decision of choosing one type of tool over the other. There are ways that you can take advantage of several different tools, including Trusts and Wills.
For instance, someone might set up a Will to express their wishes for final arrangements, plus name a Guardian for their children. They might also set up a Revocable Living Trust and fund it with most of their assets and property. They can protect their assets and yet still maintain access and control during their lifetime. If anything were to happen to them, their children will one day inherit these funds when they are old enough.
This also does not mean that they cannot also set up a special type of Irrevocable Trust for a special purpose, such as a Charitable Remainder Trust to give back to the community and also lower their estate tax bracket.
Today you learned that there is no debate between Living Trust vs. Revocable Trust. They actually hold the same meaning, and you can correctly call it a Revocable Living Trust. Having peace of mind is reason enough to set one up. Because you get to retain direct access, control, and benefit of your property, there is no reason to wait. This tool allows you to be proactive and protect your assets early in life, even when the future is uncertain. You can always change and update the Trust at any time. Further, you have the option of revoking it if you later decide to use a different tool entirely. Having a Revocable Living Trust is empowering.
Ready to get started and set up your Revocable Living Trust? We can help you with that! Our Trust product includes a Revocable Living Trust, a Pour Over Will, a Living Will, a HIPAA Authorization, and a Power of Attorney. It covers all of your estate planning bases in one easy, affordable bundle. Get started here.
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