What is a Revocable Trust?

Arevocable trustis alegal arrangementthat allows an individual, known as the grantor, to transfer ownership of assets to a trust for the benefit of themselves or their designated beneficiaries. The grantor maintains control over the trust during their lifetime and can modify or revoke it at any time. Upon the grantor's death, the trust becomes irrevocable and is managed by a trustee in accordance with the grantor's wishes.

Benefits of a Revocable Trust

One of the primary benefits of a revocable trust is that it allows assets to pass to beneficiaries without going through probate. Probate is a legal process that can be time-consuming and costly, and a revocable trust can help avoid it altogether. Additionally, a revocable trust provides privacy, as the terms of the trust are not a matter of public record like a will.

Another benefit of a revocable trust is that it can help protect assets from creditors or lawsuits. Since the trust owns the assets, they are not considered part of the grantor's estate and are therefore not subject to estate taxes. This can also lead to tax savings, as the trust can be structured to minimize tax liability.

Setting up a Revocable Trust

To set up a revocable trust, the grantor typically works with anattorneyto draft a trust agreement that outlines the terms of the trust. The grantor then transfers ownership of assets to the trust, which is managed by a trustee. The trustee can be the grantor or a third-party individual or institution.

It is important to note that a revocable trust does not protect assets from Medicaid or other government benefit programs. In order to protect assets from these programs, an irrevocable trust may be necessary.

Investing with a Revocable Trust

Investing with a revocable trust is similar to investing with an individual account. The trustee has the authority to make investment decisions on behalf of the trust, and the trust's assets should be diversified across various asset classes to minimize risk.

When investing with a revocable trust, it is important to consider the tax implications of any investment decisions. Depending on the structure of the trust, income generated by the trust may be taxed at a higher rate than individual income.

Conclusion

A revocable trust can be a useful tool for estate planning andasset protection. It allows assets to pass to beneficiaries without going through probate and provides privacy and tax benefits. However, it is important to work with an attorney to ensure the trust is set up correctly and to consider the tax implications of any investment decisions made on behalf of the trust.