Revocable trusts 101: how they work

Clients seeking to diversify their secular assets in complex or specific ways often use a living trust as the tool of choice. These multi-functional tools can provide users with a wealth of benefits and protections, ensuring that their financial wishes and needs before and after death can be effectively met.

If you are not sure how your assets will be distributed once you leave, read on to understand how revocable trusts can bring huge benefits. (Also take a look: Establish a revocable life trust.)

Revocable trust charter

A trust, as the name suggests, is a legal document created by a lawyer. A trust is similar to a company in that it is an independent entity that can own, buy, sell, hold, and manage property in accordance with a specific set of instructions.It has its own tax number and can be used as a separate entity for taxation, or it can be constructed as a transfer tool to transfer all taxable income generated by trust assets to the grantor. This is usually the case with revocable trusts, because trusts have the highest tax rates in the tax law.

There are usually four parties involved in the trust:

  • A grantor is a person who creates a trust (by paying a lawyer to draft the trust) and then funds it by depositing cash or assets in the trust account. The tangible property is simply renamed in the name of the trust.
  • The trustee is appointed by the grantor and is responsible for overseeing the management of the trust’s assets and following any instructions written by the grantor in the trust.
  • The beneficiary is the recipient of the assets for which it manages.
  • The agent or the other party who actually created the trust file.
  • In many cases, the grantor, trustee and beneficiary (at least the main beneficiary) can all be the same person. (Also take a look: 10 questions to ask your estate planning lawyer.)

All trusts are revocable or irrevocable. The former type allows the grantor to change the instructions in the trust, remove assets from the trust and terminate the trust. Irrevocable trusts are called irrevocable trusts because no one can remove the assets placed in them for any reason. The instructions written in it cannot be changed either. Most revocable trusts are called revocable lifetime trusts because they are created while the grantor is still alive.

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Pros and cons of revocable trusts

Revocable trusts can allow the grantor to diversify assets in a very difficult way in a will. All assets deposited in a revocable trust are unconditionally exempted from the probate procedure, which can greatly simplify and speed up the estate planning process. Assets deposited in a trust are usually not subject to creditors and legal judgments, which may have a huge impact on those who end in failure.

In addition, all activities related to the trust and the distribution of assets to beneficiaries are strictly confidential and will not be published in the public records of the probate court.

Their main disadvantage may be their cost, because if some trusts are complex or deal with complex intangible assets, their creation costs can be as high as thousands of dollars. (Also take a look: Life Estate and Irrevocable Trust: Which is more suitable for you?)

Types of revocable trusts

There are many types of revocable trusts designed to meet specific goals. They include:

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Qualified Terminal Interest Property (QTIP) trust: This type of trust is usually used when the grantor divorces and remarries. The grantor will designate the current spouse as the primary beneficiary, and they will use the property in the trust (such as a house) while they are still alive. Then, on the death of the second spouse, the property will be distributed to the grantor’s children in the previous marriage.

Charitable Trust: There are many types of charitable trusts that can be used to donate large amounts of property to charities in a convenient way. There are charitable surplus and charitable lead trusts, and there are charitable single trusts. All these trusts allow donors to generate substantial charitable tax deductions and provide benefits for charities they believe in.

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Incentive trust: If the beneficiary meets certain criteria set by the grantor, this type of trust can reward the beneficiary. This may include getting an education, marrying a certain type of person, or achieving other goals.

There are other types of revocable trusts designed to reduce estate taxes on wealthy grantors, protect land from litigation, and promote Medicaid spending strategies.

Bottom line

Revocable trusts can achieve many goals and provide many benefits to grantors and beneficiaries. They can be used to reduce income and estate taxes and avoid probate. Their cost will vary according to their complexity and number of uses. For more information about revocable trusts and how they can benefit you, please visit the website of the Financial Planning Association www.fpanet.org. (Also take a look: 7 reasons to have life insurance in an irrevocable trust.)

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