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What is a Revocable Trust?

What is a Revocable Trust?

What is a revocable trust and what can it offer you? In order to understand what is a revocable trust and its benefits, you will first need to go back to the basics of understanding what a trust fund is.
Rohini Mohan
We all worry about how we can help our family members to lead a comfortable life, even after we are no more. Another big issue that worries us is the status of our assets and savings. A revocable trust helps solve a lot of these concerns by providing the owner of the trust with some practical and useful rights over his estate, its management, and division among his beneficiaries.

Understanding a Trust
A trust is a contractual agreement between two parties for the simple purpose of estate planning and management of the estate/assets of the person wanting to create the trust. The person wishing to create the trust, is known as the 'Donor' or the 'grantor'. The 'trustee' is the person in whose name the trust has been left, by the grantor. The grantor makes the trust for his beneficiaries who could be his heirs, friends, or even an organization such as a charitable trust. In legal terms, the receivers of the trust are often called 'trust's beneficiaries'.

Two Basic Types of Trust
  1. Living Trust or 'Inter-vivos': This trust is made during the grantor's lifetime.
  2. Testamentary Trust: The 'will', left behind by the deceased grantor. The beneficiaries can exercise their right over the 'will' only after the death of the grantor and not before.
A living trust is further divided into two types:

Revocable Trust
The grantor makes a revocable trust within his lifetime, according to which only the grantor has complete control over his trust assets while he is alive. He has the right to completely revoke/terminate his trust or make amendments/changes to the terms or clauses of his trust agreement. Such a trust is liable for payment of taxes as it is considered a part or inclusive of the grantor's personal assets. Also, a revocable trust can be converted into an irrevocable trust if the grantor wishes to do so. The grantor can act as the trustee as well, thereby, giving himself more control over his estate and assets.

This trust is often used in place of a 'will'. While comparing between a revocable living trust vs. will, a trust is much better because, unlike a will, it helps in avoiding probate and the court approval needed to transfer the grantor's assets to the beneficiaries.The transfer of assets after the grantor's death is much faster and less expensive compared to a 'will'. A 'last will and testament' are a series of instructions that are left behind by the deceased, on how to distribute his property after his death. While a trust allows the grantor to create fiduciary rights for the trustee, who is assigned with the duty to divide the grantor's assets among his beneficiaries.

It is important that you understand the difference between an revocable and irrevocable trust, which will help clarifying any confusion.

Irrevocable Trust
Once the grantor makes this trust for his assets, he cannot revoke, terminate, or change the terms of the trust agreement without the specific consent of his trust's beneficiaries. The only advantage to the grantor is that if there are any additions or increments to his assets, those appreciations will belong to him alone and will not become a part of the trust created by him. Those increments in assets will be considered separate from his private assets and property, on which he alone will have the right to use and enjoy.

Benefits of a Revocable Trust
  1. Eliminates Probate: A probate is the court procedures to transfer the deceased grantor's trust to the beneficiaries. This is a lengthy process and takes at least a year to finalize. A revocable trust eliminates probate completely, because this trust is considered to be a part of the grantor's private property for which tax is regularly paid. The grantor has private ownership over his trust's various assets, debts, taxes and the distribution ratio of the complete assets among each and all of his beneficiaries. Therefore, since this trusts does not fall under the public domain, it is exempted from court and attorney fees, and verification.
  2. Financial Management of Trust Property: The grantor may take the role and functions of the trustee as well, he has the right to look after the financial transactions of his estate on a daily basis. In case the grantor does not wish to continue with this management, he can transfer this right to the actual trustee or successor trustee. Since the management of the trust is being handled while the grantor is still alive, he will need to pay a fee to the trustee for his services.
  3. Property Management: It is the trustee's or successor trustee's responsibility to look after the trust if the grantor is incapable of looking after his property due to illness, old age, or disability. Such a trust provides great comfort to people who cannot personally look after their assets any longer, because the duty can be delegated to another person via a legal agreement and mutual consent.
  4. Security for Your Children: A revocable trust is preferred by many parents who wish to financially protect their children in case of the sudden death of any of one of the parents or both. Death being an unforeseen eventuality, this type of trust helps secure the assets of the parents until the children are 18 years and older. You can appoint a guardian for your children and even leave your spouses as the beneficiary of the living trust along with your minor children.
How to Set Up a Revocable Trust
A revocable trust is established through a written agreement by the grantor. Such an agreement declares the appointment of a 'trustee' and 'successor trustee' for the management and distribution of the grantor's estate in a fixed ratio, among his legal heirs and other beneficiaries on his death. The type of trust must essentially be like a book of rules that must be complied with. The trustee can be any consenting adult, a federal charted bank, or a trust company that specializes in this field. An individual trustee will be required to open a revocable trust account in favor of the grantor, provide the bank all necessary details about the grantor as well as the trustee.

Process of Funding
Funding a trust means to transfer assets into that trust. A revocable trust is beneficial against probate only if all the family assets are already a part of the trust. The family assets must be transferred into the trust before the grantor's death. If any of the assets have not been transferred then they will be liable for probate and cannot be managed by the trustee. A trust can be jointly owned between spouses as well.

The advantages of a revocable trust are manifold. However, it has some disadvantages as well, such as no tax exemptions, no escape from creditors or debts, charges for setting up, and payment of annual trustee's fee. That being said, the benefits exceed the drawbacks by leaps and bounds.