The Revocable Trust: The Will-Substitute

The Revocable Trust: The Will-Substitute

Most people understand the importance of having a Will to handle the distribution of their assets upon death.  As described in our prior post (Trust Basics), when you use a Will as your primary estate planning tool, some of your assets have to pass through the formal court process (called probate) before they can be distributed to your designated beneficiaries.  The good news is that there is an estate planning tool that, when used correctly, completely cuts out the need for probate:  the revocable trust.

A revocable trust is commonly referred to as a “Will substitute” because the trust can be changed during lifetime and is used to handle the disposition of assets upon death.   However, unlike a Will, a revocable trust does not have to be filed with the probate court upon death and the assets held in the trust can be administered privately without court intervention.  If you set up a revocable trust, you retain full control over all trust assets during your lifetime. Simply put, you can invest the trust assets however you choose and use the trust funds to pay for your needs. 

One of the biggest differences between a traditional Will and a revocable trust is the titling of your assets.  If you use a traditional Will, your assets remain titled in your own name (or joint with a spouse or other individual).  However, if you use a revocable trust, the ownership of your assets is transferred to the name of your trust.  The reason this is so important is because the revocable trust only controls assets that are owned by the trust.  If you proceed with setting up a revocable trust, it is critical to make sure the trust is properly funded so the trust can provide all the desired benefits.

From an income tax perspective, the revocable trust is invisible because the trust uses your social security number as the tax identification number during your lifetime.  One of the common misconceptions about revocable trusts is that they are asset protection trusts. Revocable trusts will not protect your assets from creditors because a revocable trust uses your social security number during your lifetime, and you retain control over those assets.   

Most clients who choose to use the revocable trust as part of their estate plan like the privacy aspects and ease of administration that a revocable trust provides, both during any period of incapacity and upon your death.  

If you are interested in learning more about revocable trusts or are considering implementing this tool into your estate plan, contact us for a free consultation.