The Benefits and Shortcomings of Revocable Trusts
You may already have a Will in place that declares how you want your assets distributed at your death. A revocable trust can do the same thing, while allowing you more control over your estate plan and saving your loved ones time and money. A revocable trust will also allow you to plan for possible periods of incapacity due to illness, injury, or other circumstances.
What is a Revocable Trust?
A revocable trust is a written document that you create while you are alive and competent. In most cases, you will be the trustee and beneficiary of your revocable trust during your lifetime.
If you are married, your spouse can also be a trustee and beneficiary, until either of you passes away, at which point the surviving spouse becomes the sole trustee.
To finalize the creation of your revocable trust, you must transfer property that you own into the trust. This is referred to as funding the trust.
But, even though you have funded the trust with your property, you retain control over those assets and can add or remove them from your trust as you like, while you are alive and able.
The Benefits of a Revocable Trust
Probate Avoidance
Transferring assets to a revocable trust will save your beneficiaries time and money by avoiding probate. With only a Will in place, your beneficiaries will have to go through probate to transfer assets from your name to theirs after you pass away.
Probate can take months or even years to transfer assets. By contrast, the successor trustee of your revocable trust can quickly transfer property from your trust to your beneficiaries according to the terms of your trust document.
Control
Another benefit of a revocable trust is the control you have over how your assets will be distributed. If you don’t want a beneficiary to receive his or her inheritance outright, you can set up restrictions on how and when it will be distributed to them.
The Ability to Plan for Minor Children or Special Needs Loved Ones
Having provisions in your trust to provide for a minor child avoids the court appointment of a guardian to administer the assets they inherit, someone you may not even know. It can also prevent the release of funds in one lump sum when the minor reaches the age of majority.
For special needs individuals, having money in a trust can provide them with access to the funds they need for a better quality of life, while preserving their eligibility for public benefits.
Incapacity Planning
Besides giving you greater control and flexibility over the distribution of your assets after you die, a trust also lets you plan for the management of your estate in the event you become incapacitated during your lifetime. With longer life expectancy today, the risk of becoming incapacitated during your lifetime is higher than it ever was.
It’s not a pleasant thought, but who would manage your finances if you become unable to do so yourself? Without proper planning, a court-appointed guardianship may be required. But with a revocable trust, you can avoid this court appointment by naming a successor trustee to manage your affairs should you become incapacitated and unable to do so yourself.
Drawbacks of Revocable Trusts
There are some drawbacks associated with using a trust as a foundational estate planning document when compared to a Will:
- Higher Up-Front Costs. Setting up a trust can require more time and money than writing a Will. In most cases, you will need to pay a qualified attorney to draft the trust document for you and to assist you with transferring your assets into the Trust.
- Must be Properly Funded. A trust only works if it is properly funded with your assets. Any assets that are left outside of your trust at death will need to go through probate. You must, therefore, take steps to ensure that all of your major assets are transferred into your trust before you pass away.
- No Guardian. You cannot appoint a guardian for your minor children with a trust. While you can provide for them financially within your trust, only a Will allows you to designate a guardian to care for your minor children after you pass away. That’s one reason why all properly created trust plans also include a pour over will.
Other drawbacks of a revocable trust:
- A revocable trust offers no asset protection for the person who makes the trust. You retain control over and access to the assets in your revocable trust, but your creditors can also access your assets to satisfy debts.
- A revocable trust does not save taxes during your lifetime. A revocable trust will not help you save on either income taxes or estate taxes. This is because the IRS still treats trust property as belonging to the grantor, both for income and estate tax purposes. In Virginia, a revocable trust does save on transfer taxes related to probate after the trust maker passes away.
Is a Revocable Trust Right for You?
Whether a revocable trust is right for you will depend on a variety of factors, including the size of your estate, your family’s needs, your estate planning and financial goals, and so much more. An experienced estate planning attorney can help you evaluate your needs, prioritize your goals, and create a plan that is tailored to your particular circumstances.
If you are interested in setting up a revocable trust as a part of a comprehensive estate plan, call us today at (703) 553-2577 or use the contact form on our website to consult with a Virginia estate planning and trust specialist. We can help you evaluate the benefits and costs to determine if a revocable trust is a right fit for you and your family.
The information on this site is for general informational purposes only. The information presented in this site is not legal advice or a legal opinion. You should seek the advice of legal counsel of your choice before acting upon any of the information in this site.