Is a Revocable Trust for You?

You worked hard your whole life to build something to leave to your kids or other heirs. Many different tools exist to help make sure they get the most you can give. One we often recommend to our clients is a revocable trust.

You create a revocable trust during your life; you can change or terminate the trust at any time. You are the grantor, and in most cases, the grantor is also the trustee of the trust as well as the primary beneficiary of the trust during his or her lifetime.

A revocable trust gives you the grantor an orderly way to distribute assets after your death and privacy for your heirs during the process – and makes for a more effective estate planning tool than a will for several reasons.

Privacy. The main purpose for a revocable trust is to avoid probate, the legal process of distributing assets of a decedent at death. This process, which includes taking an inventory of assets, notifying and paying creditors and other actions, is public. Avoiding probate protects your privacy and that of your beneficiaries.

Your wishes. Similar to a will, a revocable trust can provide a thoughtful distribution of assets to heirs. You can, though, amend your trust document an unlimited number of times, so you can change the distribution of assets as you age or acquire additional assets.

At your death, a trustee you name in the document begins work with the executor of your estate to follow the guidelines set up in the trust.

Creditor protection. While revocable trusts do not provide creditor protection for the grantor, they do protect your beneficiaries of the trust if the assets remain in the trust after you die.

Reduced state estate taxes. If you live in a state that levies an additional estate tax, such as New Jersey or Oregon, a well-written revocable trust may provide your heirs significant value at the death of the second spouse. A bypass trust is created at the death of the first spouse, and it is be funded with the state estate tax limit.

You also might consider a revocable trust if you have:

  • Assets in more than one state. Without a revocable trust, assets, including real estate that you hold in multiple states are subject to a separate probate process for each one.
  • A complex collection of investments including real estate, artwork and other assets that might be difficult for beneficiaries to distribute.
  • Future health concerns. You can name a disability trustee to manage the assets in the trust if you become mentally incapacitated. This person will be in place of a court-supervised guardian or conservator.

What doesn’t a revocable trust do?

Provide tax benefits during your life. Among the many misconceptions about revocable trusts, the biggest might hinge on the benefit of a revocable trust for estate taxes: These trusts produce no benefit for estate tax purposes or even taxes during your lifetime. In the eyes of the government, assets in a revocable trust are the same as if you hold them in your own name.

Fund itself. To take advantage of the above benefits, you must change the registration on each account you own and in the trust. Many estate attorneys recommend a pour-over will. Upon your death, this kind of will collects and transfers all your additional assets (jewelry or cars, for example) into the revocable trust so that no assets go through probate.

Eliminate the federal lifetime gifting and estate tax exemption. Tax authorities do not consider moving assets into a revocable trust as a gift and the move does not affect your federal lifetime estate tax exemption, currently a total of $5.43 million.

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Travis Russell, CFP, is Vice President and client advisor at Glassman Wealth Services, a fee-only investment management, financial planning and wealth management firm in McLean, Va.

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