The purpose of estate tax planning is to maximize the assets you pass on to future generations by minimizing gift and estate taxes. Estate-tax strategies revolve around the use of irrevocable trusts. This article discusses the most common types of irrevocable trusts that are used to minimize gift and estate […]
A revocable trust (also known as a “revocable living trust”) is a type of trust that can be modified or revoked by the grantor (creator) of the trust. The grantor of the trust has full control over the trust and all assets within it until he or she passes away or becomes incapacitated. The grantor can change the terms of the trust at any time, making this type of trust highly flexible. Because of their role in estate planning, discussed below, these trusts have become very popular in recent decades. They are the most common type of trust in the United States today.
The most common reason people create revocable trusts is to avoid probate. As you may know, probate is the legal process by which a court determines the rightful ownership of a deceased person’s assets. If the deceased person had a will but no revocable trust, or if the deceased person had no estate planning documents at all, then probate is necessary. A probate judge will review the deceased person’s will, approve it, and then authorize the deceased person’s assets to be distributed according to the will’s terms. If there is no will, the probate judge will order the deceased person’s assets to be distributed according to state law.
The problem is that probate is a long, expensive process. That’s where revocable trusts come in. Like a will, a revocable trust contains instructions about where a person’s assets should go on his or her death. But, unlike a will, a trust doesn’t have to go through probate. By setting up such a trust, you can help your heirs avoid having to deal with the expense and delay of probate.
There’s a second, less common reason that people set up revocable trusts: privacy. Let’s say you want to buy a house, but you don’t want anyone to know that you own it. If you buy the house in your own name, someone can theoretically find the deed (which is a public document) and discover that you’re the owner of the house. But if you buy the house in a revocable trust, the trustee of the trust will be listed as the new owner of the house. That might be enough to disguise your ownership of the property.
Like all trusts, revocable trusts are controlled by the trustee. Usually the grantor will name themselves as the trustee of their own revocable trust. Occasionally, someone will want to name a third party as trustee. For example, a person who is concerned about privacy might not want other people to realize that they’re the trustee of a revocable trust, which could give away their connection to the trust’s assets. In that case, the grantor may name his or her accountant or attorney as trustee while retaining the right to remove and replace the trustee.
Revocable trusts are grantor trusts. That means that, for income-tax purposes, they are disregarded. Any income generated by a revocable trust will be reported on the grantor’s income tax return.
Upon the grantor’s death, the trust becomes irrevocable. The trustee then distributes the assets in accordance with the terms of the trust.
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