The estate planning technique used by most trusts and estates attorneys these days is the revocable trust.  That begs the question, “What is a revocable trust?”  To understand what a revocable trust is and how it works, it is good to first take a step back and understand what a trust is.  A trust is simply an agreement (think of it like a contract) between a “trustmaker” or “grantor” (the person who puts assets into the trust) and a “trustee” (the person or company that holds and manages the trust assets).  In the trust agreement, the trustee agrees to hold and manage the trust assets for the benefit of a “beneficiary.”

With this basic understanding of what a trust is, you are ready for a revocable trust definition.  A revocable trust is a trust in which the trustmaker reserves the right to revoke or cancel the trust agreement.  That is really all it is. The reason people are often confused about revocable trusts is that the trustmaker, the trustee, and the beneficiary are often all the same person.  When you create a revocable trust, you simply transfer property from yourself (as an individual) to yourself (as trustee of your trust), to be held and managed for the benefit of yourself (as beneficiary of the trust).  So why in the world would anyone do that?

The beauty of using a revocable trust for your estate plan is that during your life you are free to use or transfer the trust assets as if they were your own property.  The IRS ignores revocable trusts as disregarded entities.  That means there are no tax consequences for using or transferring trust assets.  Now here is the really fun part.  In the trust, you can make provisions for what happens when you pass away or become incapacitated.  You can name a successor trustee and successor beneficiaries and you can spell out exactly what rules the successor trustee must follow in managing and distributing trust assets to the beneficiaries.

There are several benefits of having a revocable trust as your family trust.  The two major benefits are:

1)      Avoiding Probate – When you die, if you own assets in your name exceeding a specified dollar amount in value ($100,000 in Utah), your assets will have to go through probate before they get distributed to your loved ones.  Probate is a time consuming, public, and expensive process.  When you set up a revocable trust and put all of your assets into the trust, you do not hold any assets in your own name.  You hold them as trustee of your trust.  When you die, the successor trustee simply steps in for you and administers the trust according to the terms of the trust agreement.  There is no need for probate because you don’t own the property in your name.  Your estate can be distributed to your loved ones quickly and privately, and there is no need to waste money on the costs associated with probate.

2)      Planning for Incapacity – Incapacity is very common.  According to recent government statistics, about 80% of people are incapacitated at least once during their lives for an extended period of time (2+ years on average).  Many people fail to realize that if they are incapacitated, a friend or a family member cannot just step in and start managing their assets on their behalf.  There is a time consuming expensive court administered process that must take place, in which the court appoints a conservator to act on behalf of the incapacitated individual.  With a revocable family trust, that whole process can be avoided because you can specify in your trust that if you are incapacitated, your successor trustee steps in and manages the trust assets according to the terms of the trust.

In conclusion, revocable trusts are very effective estate planning tools.  By setting one up with the assistance and counsel of a competent and experienced trusts and estates attorney, you can ensure that your legacy is passed on to your loved ones in the best way possible.

For additional reading:

Common Trust Plan Funding Mistakes

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