Planning for your future is incredibly important. In addition to creating a solid financial plan to build your wealth, you also need to think about what will happen when you pass on. Only 30% of women have a long-term financial plan in place. This might sound dreary, but it's important to make sure your loved ones are taken care of.
A revocable trust can be a good way to build generational wealth and make sure your estate gets in the right hands after your death. But what is a revocable trust? We'll go into that more below so you can find out everything you need to know about your end-of-life financial plans.
What is a revocable trust?
Simply put, a revocable trust is a document that says how your assets will be managed when you die. You might also hear it called a revocable living trust. A revocable trust can cover many things, including your investments, bank account funds, property, and more. While you're still alive, you choose who you'd like to receive these things if you die.
But what makes a revocable trust different from other trusts is that you can make changes to it at any time. This means if you get into a fight with a relative or divorce your husband, it's easy to remove their name from your trust or change how much they'll receive.
Who is involved in a revocable trust?
When it comes down to it, there are four main parties involved in a revocable trust. They include the grantor, trustee, beneficiary, and attorney.
- Grantor: The grantor is the person who is creating the trust as a way to distribute their assets when they die.
- Trustee: The trustee is an individual assigned to manage and distribute the assets in the trust once the grantor dies.
- Beneficiary: The beneficiary is the one who receives assets when the grantor dies.
- Attorney: It's common to hire an estate planning attorney to handle the legal aspects of the trust.
Three phases of a revocable trust
Hopefully, you understand the basics of a revocable trust now, so let's go over the timeline of how it works. There are three main phases to go through.
1. Grantor is alive
While the grantor is alive, they should start preparing their trust. This might include getting in touch with their attorney, defining their provisions, and picking out a trustee.
2. Grantor is incompetent
There's always a chance the grantor might become incapacitated in some way before they die. If this happens, the trustee will need to step up to manage the trust.
3. Grantor dies
When the grantor dies, the revocable trust can no longer be altered. What's written is set in stone, and the assets must now be legally distributed according to the grantor's wishes.
Types of revocable trusts
Believe it or not, there's not just one kind of revocable trust. You might hear several terms being thrown around in conjunction with revocable trust. Here are a few of the common ways to set up a revocable trust.
Qualified terminal interest property
You might create this kind of trust if you get divorced and remarry. It works by allowing you to name your new spouse as the primary beneficiary as long as they live. However, when they die, the assets they inherited from you will go to any children you had from your first marriage.
Charitable trust
If you don't have a ton of relatives or just love helping others, you might consider a charitable trust. With this trust, you'll be able to donate your assets to charities of your choice when you die while reaping tax deductions during your lifetime. It's a win-win!
Incentive trust
Don't you wish you could make certain stipulations people had to meet before they got your money? You can with an incentive trust. For example, you might decree that your child has to get married or graduate from college before they can unlock full access to their inheritance.
Do you want a revocable trust?
Deciding on a revocable trust all depends on your relationships. First: do you have a big family? Would things get tricky deciding who gets what after you die? If so, having this type of trust can help you outline that to avoid clashes during an already traumatic time.
Second: do you have kids? Generally, inheritance law says that children inherit the property and assets of their parents after their death. But considering 15.4% of women 45 to 50 years old don't have kids, that's a large chunk of the population without a guaranteed successor. In these cases, revocable trusts just make things a whole lot easier.
You may want to consider a revocable trust for the other benefits it brings, but we'll go into that more below.
How is a revocable trust different than an irrevocable trust?
Your estate planning attorney might also bring up the idea of an irrevocable trust and having irrevocable beneficiaries. How is that different from a revocable trust? Basically, an irrevocable trust can't be changed.
Once you set down in writing how you want your assets distributed, you won't be able to modify it on your own. You'll have to get the written permission of everyone named in the trust before you can make any modifications. That's because once you place your assets in an irrevocable trust, they technically don't belong to you anymore — they actually belong to the trust.
If an irrevocable trust sounds limiting, that's because it is. That said, it can have some tax advantages. Because you no longer own the assets in an irrevocable trust, you don't have to pay individual taxes on them, even if you're still using them for profit, like in the case of a rental home. While you do sign over your assets in a revocable trust as well, you still have to pay taxes on them until you die.
So for some, irrevocable trusts are the way to go. But as you'll see below, revocable trusts have a lot more benefits.
Benefits of a revocable trust
So why might you want a revocable trust when you're planning out your financing for the future? There are a number of benefits to consider.
You can change a revocable trust as you see fit
Life happens. Relationships change. With a revocable trust, you aren't locked into choosing who your beneficiaries will be.
You're covered in case you become impaired
Other forms of estate planning, like wills or irrevocable trusts, don't have any provisions for what happens if you become incapacitated before you die. A revocable trust names a trustee who has to act in your best interests if this happens.
You'll avoid probate
Perhaps the biggest benefit of a revocable trust is to avoid probate. This is usually a long, drawn-out process where a court has to legally go through all of your assets before they can be distributed. Your family won't want to deal with this after losing you. Because the trust names a trustee, it skips over the tedious courtroom proceedings, making the process far quicker. That said, you will need to transfer all of your assets over to the trust to avoid probate, which you might not want to do while you're still alive.
You'll save your family some money
Let's be real — there are a lot of upfront costs to creating a revocable trust, which may make them unappealing for some. You'll need to pay to work with an estate attorney to transfer your assets to the trust. However, once you pay these costs, that's all there is to it. Your family won't have to pay probate fees once you die, which can be as much as 10% of your estate.
Your estate will stay private
With a standard will, once you die, that information all becomes public. Anyone can see what your beneficiaries are inheriting. Not cool if you value privacy. Luckily, a revocable trust keeps things private so prying eyes don't learn this sensitive info.
You'll receive FDIC protection
You probably already know that the FDIC insures bank accounts up to $250,000. But that amount goes up with a revocable trust. You'll get $250,000 of insurance per beneficiary, with a maximum limit of $1,250,000 total.
How to set up a revocable trust
Setting up a revocable trust is easy when you're working with a professional. We don't recommend trying it on your own, as there is a lot to process. Generally, you'll go through the below steps.
- Find a local estate attorney with experience in revocable trusts.
- They'll ask you to fill out a lot of paperwork. You'll need to provide:
- Your name.
- The name of the trustee.
- The successor trustee (basically, the backup trustee in case the original trustee dies).
- The beneficiaries.
- The property you wish to distribute.
- You'll take this agreement to a notary and sign it there.
- Once the agreement is signed, you'll need to fund your trust. This requires you to transfer the property into the trust.
Bottom line: Is a revocable trust right for you?
A revocable trust can be a great choice if you have a lot of assets and a lot of family. Creating this type of trust avoids probate and speeds up the distribution process after you die. Plus, it gives you the chance to make changes to your beneficiaries should you have a falling out.
That said, there are plenty of downsides to a revocable trust. Technically, you'll no longer own some of your assets — they'll be a part of the trust. And you'll still have to pay taxes on anything in the trust.
At the end of the day, it all really comes down to your personal situation. Your best bet might be to consult with an estate attorney so they can guide you through the best financial plan.