A Comprehensive Guide to Revocable Living Trusts

By Mike Obel | AUG 30, 2023

A revocable living trust is something some people use as part of their estate plan. It’s a legal framework into which assets like money, securities, bonds and physical assets can be placed for later distribution to your descendants or other beneficiaries after you die. Revocable living trusts, which are one type of living trust, may be favored by younger people getting a head start on estate planning because of the flexibility they offer. Consider working with a financial advisor as you create or update an estate plan.

What Is a Revocable Living Trust?

A revocable living trust, also known more simply as a revocable trust, is a legal framework often used in estate planning. As with all living trusts, it’s formed when the grantor, also known as the trustor, is alive. Property and assets meant to be in the trust are then titled in the name of the trust, which subsequently takes ownership of the assets. You’ll also name a trustee, who’s responsible for managing the trust. You can name yourself as trustee, but you’ll need to designate someone to take over as successor trustee when you die.

You can form a living trust while you’re alive, but it will remain in place after you die. Generally speaking, the person you designate as trustee will be in charge of handing your property out to the people you want to get it once you have passed. For this reason, it’s important to remember that a living trust is something you use in addition to a will, not to replace it. The trust is where the property is stored, and it may allow for the time-consuming and costly probate process to be expedited or avoided altogether. Your will, though, is how you actually let your trustee and your estate’s executor know who receives what.

Also, a revocable trust can be useful if you ever become incapacitated. If that should happen, then your trustee can take over automatically and manage your affairs. There’s no need to go through court proceedings or have a conservator appointed. In addition, revocable trusts also account for guardianship. In turn, you can stipulate living situations and spending habits for minor children in the terms of your revocable trust.

Revocable Living Trusts vs. Irrevocable Living Trusts

Unlike an irrevocable trust, a revocable trust is one that can be altered or even revoked while you’re alive. You can put property in and then take it out again, which is useful if you need flexibility. For instance, let's say you put $100,000 in cash in your revocable trust with the idea that it will be passed on to your grandchildren upon your death. It turns out, though, that you live significantly longer than you thought you were going to, and you need some of that money to continue funding your life in retirement. You can take some of that money out and transfer it back into your ownership for personal use.

An irrevocable living trust, on the other hand, is something that cannot be altered without the permission of the beneficiary or beneficiaries. Once property is placed into an irrevocable trust, you cannot remove it, and you cannot fold the trust entirely. Another key difference between revocable and irrevocable trusts is that with the latter, the grantor cannot also be the trustee.  

Taxes are another key difference between irrevocable and revocable living trusts. With a revocable living trust, you maintain ownership of the property and have to pay any relevant taxes. For instance, if you sell stocks that were held in the trust, you’ll have to pay taxes on any capital gains.

On the flip side, ownership is transferred entirely to the trust with an irrevocable trust. Assets in an irrevocable trust are also not subject to estate taxes. Holding assets in an irrevocable trust can be useful if you’re trying to qualify for Medicaid to help pay for long-term care and want to avoid having to spend down assets.

Another thing to remember is that revocable trusts are vulnerable to creditors, while irrevocable trusts are not. If you find yourself in a situation where you owe money, say because of a legal judgment, the person you owe may be able to take assets from your revocable trust. An irrevocable living trust, though, is generally safe from creditors. That’s because you technically have ceded ownership of the property to the trust itself.

How to Form a Revocable Living Trust

Forming a revocable living trust is a simple matter of filling out some forms produced by your state government and filing them. You can download the forms, generally found on your state government’s website. That said, there are some parts of the process that are much easier with a little bit of legal know-how. Keep in mind that a filing mistake can cause serious problems for your family after you die.

For this reason, it makes sense for most people to get help with creating a revocable living trust. You can use a lawyer, but make sure it’s someone who specializes in trusts and knows the relevant laws in your state. You can also find a financial advisor, but again you’ll want to make sure it’s someone who is an estate planning specialist that has experience with trusts. When you meet with a lawyer or financial advisor, make sure you let them know that forming a trust is one of the services you’ll need from them and ask about their experience. 

Bottom Line

A revocable living trust is a type of legal framework often used for estate planning. You can use a revocable living trust to store property to be dispersed after you die, and it may save your family some time in the probate process. These offer great flexibility, as property can be taken out of it if needed and the trust itself can be collapsed, should you want to do that. There are potential drawbacks, though, when it comes to taxes, control and creditors. If you’re looking to protect assets, minimize estate taxes or access government benefits, an irrevocable trust may be more suitable than a revocable one. A lawyer or financial advisor can help you create a revocable living trust, though such assistance, while valuable, is not legally required. 

Estate Planning Tips

• A financial advisor can help you with all aspects of estate planning, not just trusts. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors in your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Writing a will is also important, and people often make simple mistakes. One major mistake is not naming a guardian for any minor children you have. It isn’t fun to think about, but it's important everyone is ready in case the worst happens.

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