If you're opinionated about who gets your wealth once you're gone, you should know about revocable trusts and how they work. Read on to learn the basics of this popular estate planning tool.
Definition
What is a revocable trust?
A trust is a legal structure that can hold and manage assets according to defined instructions. A revocable trust leaves control of the trust assets with the grantor -- that's the person who initiated the trust's creation. Grantors may also be called settlors, trustors, or trust creators.
Leaving control of the assets with the grantor has several legal implications. One, the grantor can amend the trust in any way at any time without anyone else's permission. Two, the grantor can continue to use and earn income from trust assets until she or he passes away. And three, the trust assets are included in the valuation of the grantor's wealth when estate taxes are assessed.
If a trust is not revocable, then it is (appropriately) called an irrevocable trust. An irrevocable trust requires the grantor to surrender all rights to the trust assets. This type of trust cannot be modified without a court order.
Note that revocable trusts can become irrevocable. This usually happens when the grantor passes away or becomes incapacitated. Irrevocability prevents changes to the trust that aren't in the spirit of the grantor's wishes.
Why it's used
Why create a revocable trust?
Revocable trusts are most commonly used in estate planning to distribute your wealth after you die. This can also be done with a will or an irrevocable trust, but those options have different features.
When you use a will to define the distribution of your assets, those assets go through probate. Trust assets do not. Also, relative to a will, a trust can handle more complex situations. And you can continue to use assets in a revocable trust -- which is not the case with an irrevocable trust.
Let's talk about each of these factors below.
- Trust assets don't go through probate. Probate is a lengthy court process that involves inventorying and liquidating assets, paying creditors, and distributing wealth to beneficiaries. The probate documents, including the will of the deceased, become public record, accessible by anyone. On the other hand, trust records generally remain private, which grantors and beneficiaries usually appreciate.
- A trust can handle more complex distribution scenarios. A trust can hold and manage funds for minor beneficiaries. A trust can also distribute wealth in increments rather than all at once. This can be useful if a beneficiary is prone to managing cash windfalls irresponsibly. You could also use a trust to pay for care for a disabled beneficiary.
- You can continue to use the assets in a revocable trust. You can place real estate, cars, bank accounts, and non-retirement investment accounts into a revocable trust. Although these assets technically become property of the trust, you can continue to live in the home, drive the car, and trade in the investment account.
How to set it up
Steps to setting up a revocable trust
Revocable trusts are usually created by an estate attorney. The attorney drafts a trust document that lists the people involved (grantor, trustee, successor trustee, beneficiaries), the assets, and the distribution rules.
The trustee manages the assets in the trust. Typically, the grantor is the initial trustee. When the grantor passes away, the named successor trustee takes over.
Once the trust document is finalized, the grantor signs it and has it notarized.
The last step is the most tedious. Once the trust is created, the grantor must transfer ownership of the assets to the trust. This can involve changing real estate deeds, car titles, and names on bank accounts.
Grantors will often couple a revocable trust with a pour-over will. The pour-over will transfers any remaining personal property into the trust when the grantor dies.
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Example
Donald Trump's revocable trust in the news
Former U.S. President Trump may be the grantor of the world's most famous revocable trust. The Donald J. Trump Revocable Trust first made headlines in 2017, when Trump began his term as president. Trump transferred business assets into the trust to avoid conflicts of interest during his presidency.
The move generated criticism from media and political watchdogs who felt the revocable structure did not adequately prevent conflicts of interest. A blind trust, which is managed by a separate trustee without input from the grantor, would have separated those assets more definitively from the president.
The revocable trust named Trump as the sole beneficiary. The trustees were Donald Trump, Jr. and Trump Organization CFO Allen Weisselberg, two individuals who were very close to the president at that time. The trust also gave Trump two rights that raised eyebrows. He could take money out on request without public disclosure, and he could remove the trustees and step into that role himself.
Although Trump's use of a revocable trust is unconventional, it does show the flexibility of this structure and the grantor's ongoing rights with respect to the assets.
But fast-forward five years, and Trump's revocable trust was in the headlines again. In 2022, New York Attorney General Letitia James initiated a civil lawsuit against Trump, alleging business fraud. As part of the lawsuit, James requested to review the trust documents -- arguing that the trust owned assets involved in the charges.
Trump responded with a lawsuit seeking emergency protection of those documents. A judge later dismissed the suit. The fraud case initiated by James is ongoing, however, and is scheduled for trial in October 2023.
Chances are, your revocable trust will have the more common purpose of distributing wealth to your heirs. So, you're unlikely to field any public criticism or privacy complications as Trump did. Sure, your loved ones might squabble over your decisions after you're gone. But you can expect your trust documents to stay out of the public record.
