You’ve worked hard to build up your property and your savings. What’s the best way to protect your estate and pass it on to your heirs?
You could write a will, but a will has its drawbacks. An estate can be tied up in probate for months, with fees eating up some of the inheritance. People concerned about these issues have another option: creating a revocable trust.
Here are 5 things to consider when setting up a revocable trust.
1. What Is a Revocable Trust
A revocable trust is a legal arrangement in which an individual (the settlor) shifts ownership of personal property into the legal ownership of the trust. This property can include all types of assets, including land, bank accounts, houses, jewelry, or intellectual property. A revocable trust can be set up at any point and can also be changed or dismantled if desired.
The trust is overseen by a trustee, who may be a family member or friend, a corporation, a bank, or the person who originally created the trust.
The trust agreement documents the settlor’s instructions, including how the assets are to be managed, who receives income from the trust, and who the beneficiaries are.
The trust names the beneficiaries that will inherit at the termination of the trust, such as when the settlor passes away. The beneficiaries could be individuals, such as friends and family members, or organizations, such as charities.
2. Differences Between a Revocable Trust and a Will
When choosing whether to create a revocable trust or a will, there are many aspects to consider.
Going Through Probate
The main reason people chose to establish a living trust is to bypass probate, the process through which the courts oversee the distribution of property from a will. Since a revocable trust does not go through probate, it can sometimes be settled faster, and can save the costs of the probate process.
When a will is executed, going through probate can take a year or longer, and the personal representative in charge of the will might need to report regularly back to the courts. The estate must also pay probate costs, such as fees owed to executors, attorneys, or accountants. These fees can add up to 5-10% of the total estate.
Since the creation of a revocable trust requires a property to be listed and then transferred to the living trust, the process of setting up a living trust can be much more expensive than writing a will.
Creating a Will and a Trust
In most situations, you will need to create both a will and a trust.
A will created in addition to a revocable trust can address the distribution of all assets not included in the trust. In one simple type of will, a “pour-over will,” everything that hasn’t been assigned to the trust gets “poured” into it, including property that was not originally transferred to the trust, or property that was acquired after the trust was created.
3. Revocable versus Irrevocable Trusts
There is another type of trust commonly used in estate planning: irrevocable trusts.
A revocable trust transfers ownership of estates and assets to the trust, but the settlor keeps the power to change or terminate the revocable trust.
An irrevocable trust permanently transfers ownership of assets to the trust. The settlor cannot revoke the trust or control the property. For this reason, most people choose a revocable trust instead. However, some people favor an irrevocable trust because it can assist in nursing home planning.
4. Transferring Assets to the Trust
Since a revocable trust holds the estate and assets of the settlor, it takes a lot of paperwork to set up a trust.
When creating a trust, make a list of all the assets you own. This can include the land you own, large items like your home or car, small items such as your jewelry, or financial assets such as stocks and life insurance properties.
Once you have listed your assets, you will need to find paperwork for all the assets, including automobile titles, property deeds, stock certificates, or life insurance information. Some of this paperwork will need to be redone as you transfer your assets to the trust. For instance, after you set up a living trust you will need to get a new deed for your house, showing that the house is the property of the revocable trust.
After the assets have been placed in a trust, the settlor can allow a trustee to manage the estate and administration work. This is one reason people choose revocable trusts.
5. Providing for Minor Children
If you have children who are under 18 years old, you must create a will to name legal guardians for your children in the event of your death. You cannot name a legal guardian for a child in a revocable trust.
However, you can set up a child’s subtrust within a revocable trust. In this case, the successor trustee would manage the property you leave to the child.
Setting up a Revocable Trust
If creating a revocable trust seems like the best way to protect your assets, our team can advise you on all the details that go into the creation of a trust. Contact us to learn more.