Revocable living trust: definition and role in estate planning 

The revocable living trust is also known as a living trust or inter vivos trust and serves as a flexible estate planning instrument, taking effect immediately after its creation. This means that individuals can retain control over their assets during their lifetime, making changes or revoking the trust if circumstances change or if they wish to modify their estate plan. 

How does it work? What is the purpose of a revocable living trust? The primary role of this type of trust is to provide a comprehensive framework for managing and distributing assets, both during the grantor’s lifetime and after their passing.  

In this article, InvestmentNews provides beneficial information like the revocable living trust’s pros and cons, comparisons between the revocable living trust vs a will. We will also delve into how to create a revocable living trust and other pertinent topics.  

What is a revocable living trust? 

Also known simply as a revocable trust, the revocable living trust (RLT) is a legal document. Its purpose is to give or assign the authority to a person to make decisions on assets (like property or money) that are held in a trust.  

Typically, people set up a revocable living trust to assign the power to make financial decisions in their place but only if they are incapacitated due to injury or illness. Trusts are often used by clients to keep control of their property and decide on who gets their money and/or property after they pass away. 

How do you create a revocable living trust? 

It can be a straightforward process when an investor decides to create a revocable living trust. All an investor must do is follow these steps:  

Step 1. Draft a trust document.  

This is the all-important first step when creating a revocable living trust. The trust document is crucial since it contains all the important details, such as:  

• the grantor or settlor 
• the trustee 
• a named successor to the trustee if the trustee dies 
• the heirs or beneficiaries of the trust assets 
• the trust assets 
• how the assets are distributed to the beneficiaries of the trust

Step 2. Sign the trust document and have it notarized.  

To make the trust document official, it must be signed by the grantor and the trustee. After signing, it must also be notarized by a notary public to make it legally binding.  

Estate planners may have to check their state laws about notary laws, but in general, it is also the notary public’s responsibility to verify the identity of the people named in the documents. 

The notary is also responsible for verifying that all the information in the document is consistent with the grantor’s wishes. Notarization not only makes the trust binding but also adds an additional layer of protection, ensuring that no one assumes the grantor’s identity and steals the assets. 

Step 3. Transfer or place assets in the trust.  

Finally, the grantor places assets in the trust, which can include bank accounts, investments, and real estate properties. Limited Liability Companies (LLCs) and personal property like pieces of art or art collections, or even expensive jewelry can also be placed in the trust. Assets that the grantor wishes to transfer to the trust must be re-titled in the trust’s name.  

What kind of assets can you put into a trust?  

There are many different sorts of assets that your client, the grantor, can put into a trust and leave for their beneficiaries. The transferred assets can include:  

• tangible personal property such as artworks, furniture, sports collectibles, and jewelry 
• limited liability companies (LLCs) 
• insurance policies 
• cryptocurrency 
• savings accounts 
• checking accounts 
• safe deposit boxes 

• certificates of deposit (CDs) 
• mutual funds 
• bonds 
• shares of stock 
• real estate property 

Here’s a video that explains in a bit more detail the sort of assets that your client can or should place in a revocable living trust. Hint: tangible assets that have titles or can be titled are one category. The other asset types are intangible assets like investments.  

The video goes on to advise that revocable trusts should be funded, meaning filled with assets ASAP. Watch for more information.  

Can you put a life insurance policy in a trust? 

Yes. In fact, placing a life insurance policy within a trust creates a type of living trust that is known as a life insurance trust.  

In this type of living trust, an investor transfers ownership of their whole life insurance or term policy to the trust. The trust becomes the owner of the policy, and the trustee manages the policy’s benefits. 

How much does it cost to set up a revocable living trust?  

On average, it costs about $1,500 to $2,000 to hire a probate attorney to set up a living trust. This is the usual rate for creating a living trust in every state in the US.  

Advantages of a revocable living trust 

There are a few advantages and disadvantages to having a revocable living trust, if the investor decides to use this as one of their estate planning tools. Here are the advantages:  

1. Revocable living trusts cover the grantor’s assets during their lifetime. The trust also takes care of the assets when they are incapacitated or even after they pass away.  

2. The grantor can change or modify the trust at any time, making it a flexible wealth management tool. 

3. A revocable living trust will allow the grantor’s beneficiaries to avoid probate after the grantor dies.  

4. Revocable living trusts can be expensive to set up, but this can save clients more burdensome expenses in the long run.  

5. All trust assets benefit from FDIC (Federal Deposit Insurance Company) protection.  

6. Revocable living trusts, unlike a last will and testament, are not subject to probate and therefore no court has access to its contents. Without probate, the trust remains confidential and none of its contents becomes a matter of public record.  

Disadvantages of a revocable living trust 

On the flipside, an RLT has its share of disadvantages:  

1. All assets transferred or added to the trust must be retitled. This can be a long process.  

2. In some cases, revocable living trusts can cost more to set up compared to wills.  

3. The grantor does not enjoy any sort of tax benefits from having a revocable trust. 

4. Some assets may not qualify for transferring into a trust, such as:  

• medical savings accounts (MSAs) and health savings accounts (HSAs) 
• retirement accounts like 403(b)s, 401(k)s, and IRAs
• any assets that are located outside of the US 
• cash (though you can include bank accounts containing cash) 
• vehicles 

Revocable living trust vs a will 

The main difference between a will and an RLT is when they take effect. A will does not take effect until the investor who drafted the will dies. A revocable living trust goes into effect as soon as the trust is funded and signed by the grantor and trustee. Other differences between them include:  

Revocable Living Trust	Last Will & Testament
Takes effect after funding and signing the trust	Takes effect only after the person dies
Manages assets once they enter the trust	Does not manage any assets until the person dies
Contains instructions for distributing assets	Goes into probate court before distributing assets
Follows grantor’s wishes in distributing assets	Court ultimately decides asset distribution
No probate, so trust remains private	Probate makes will public record
Assigns trustee and their successor	Can give power of attorney to trusted person
Only names beneficiaries	Can name a guardian for minor children

Revocable living trust vs irrevocable trust 

The most visible difference between the RLT and the irrevocable trust is that an RLT can be voided or changed whenever the grantor wishes. The irrevocable trust, meanwhile, cannot be voided or changed unless there is a court order or a signed agreement among all the beneficiaries. There are several advantages and uses for an irrevocable trust, but we’ll focus on the revocable trust in this article. 

Revocable Living Trust	Irrevocable Trust
Can be changed or voided when grantor wants	Changed via court order or beneficiaries’ agreement
Ownership of trust assets stay with grantor	Ownership of assets transfer to the trust
Grantor pays any income taxes on trust assets	The trust pays taxes on any income of the assets
Easier to set up	More complex to set up
Does not protect assets from creditors	Provides some protection from creditors

An important technicality to remember: once a grantor dies, their revocable living trust then becomes an irrevocable trust. The last changes to the terms, beneficiaries, trustee, trustee successor, assets, etc. in the revocable trust become unchangeable as the trust becomes irrevocable.  

Taxation for revocable living trusts and irrevocable trusts 

1. Taxing Revocable Trusts 

Another crucial difference between revocable living trusts and irrevocable trusts is how they are taxed. In a revocable living trust, the taxes are charged to the grantor as the trust assets are still under their control. 

Any income generated by the trust assets are charged to the grantor’s personal income taxes. Items involving income, deductions, and tax credits on assets are reported on the trust creator’s income tax returns. No return is filed for the trust. Revocable trusts are considered “grantor” trusts for income tax purposes.  

2. Taxing Irrevocable Trusts 

Income of an irrevocable trust with a tax identification number is reported with a Form 1099, and a trust has its income and deductions reported every year with a Form 1041. The taxes for irrevocable trusts are further subdivided into:  

• Grantor trusts – As with taxing a revocable living trust, the grantor, meaning the individual who contributed assets to the trust, pays the income tax. However, when the creator of the trust passes away or otherwise relinquishes the rights causing the trust to be a grantor trust, the trust’s income will no longer be taxable to the grantor, and the trust will no longer be considered a grantor trust. In this case, the beneficiaries of the trust will pay income taxes from then on.  

• Non–grantor trusts – This is in cases where the trustee pays expenses on behalf of the trust’s beneficiaries, or when the irrevocable trust is simply not a grantor trust. The trust will receive a tax deduction and all or part of the income is taxed, with the beneficiary or beneficiaries owing the taxes.  

Paying estate taxes 

When it comes to paying estate taxes, there are situations where the beneficiaries are exempt: 

• If the trust’s creator has a spouse with all the trust assets transferred to their spouse after they die, then the properties bequeathed to the surviving spouse are not subject to estate taxes.  
• If one or more charitable organizations are named as beneficiaries, then the amounts or portions of the assets going to these organizations are likewise exempt from estate taxes.  

Only the children of the trust’s creator will have to pay estate taxes on the portion of the trust assets they inherit.  

There’s a case to be made for a revocable living trust, but these depend on your client’s needs and financial goals. For example, a married client with no children would benefit from a revocable living trust, as their surviving spouse would not pay estate taxes when they inherit the trust assets.  

Even comic genius Robin Williams was seemingly aware of how trusts could secure his children’s futures. 

If your client is a celebrity and would prefer to keep the details of their estate and succession plan private, then a trust would be indispensable in keeping the prying eyes of the media away. This is especially important, since not having either a trust or a will can complicate things for heirs and make it public.  

A revocable living trust can also let your client access their assets and the earnings, then leave the assets to their heirs.  

For more flexibility in estate planning, investors have the option to make the trust a beneficiary of their Last Will and Testament.  

Lastly, revocable living trusts are relatively easy to establish – it’s possible to set one up without the assistance of a lawyer.  

If you found this article on revocable living trusts informative, remember that InvestmentNews has many more resources on revocable living trusts and many other estate planning topics.