Revocable trusts can go by other names like living trusts, inter vivos trusts or even “loving” trusts, but their purpose is the same: to address the problems that traditional last wills and testaments cannot solve.
Under a revocable trust, the grantor’s assets go into the trust and are no longer in the grantor’s possession. But sometimes, estate planning can be confusing.
If assets are not in the ownership of the grantor, who owns the property in a revocable trust? What becomes of the property in trust after the death of the grantor? InvestmentNews provides insight into these and other questions about property ownership in a revocable trust, so let’s begin.
A revocable trust is a legal entity created to hold assets for the benefit of another person or persons. Anyone who creates a trust can place any sort of asset into the trust, such as:
The assets placed in the trust agreement depend largely on the grantor (the creator of the trust), their financial goals, and their wishes for their beneficiaries. There are two main reasons for setting up a revocable trust:
If revocable trusts tell a story about safeguarding wealth, here are the characters that are part of that story:
Trusts are typically defined in terms of the parties involved, namely the grantor, trustee and beneficiary or beneficiaries, and their relationship with the properties held in the trust.
A grantor is the person who:
There can be more than one grantor in a trust. Also, the grantor becomes the decedent of the trust after they pass away. Other names a grantor can be called are:
Trustees can be any individual or legal entity assigned by the grantor to oversee the assets and manage the trust. The trustee holds title to the property in the trust on behalf of the beneficiaries.
It is the trustee’s duty to manage the property according to the rules outlined in the trust document. They must do so in the best interests of the beneficiaries.
Trustees may be one of the following:
Some of a trustee’s duties include:
The beneficiary or beneficiaries are the people benefiting from the trust. Multiple trust beneficiaries often do not share the same interests in the trust assets.
Trust beneficiaries do not have to exist when the trust is being drafted. In most cases, grantors can make almost any person or legal entity designated beneficiaries of a trust, will, or life insurance policy. Grantors can state that the beneficiaries only receive the funds in the trust if they meet certain conditions like getting into college or getting married.
To know exactly which person or legal entity owns the trust, concerned parties should look at the provisions of the trust. There may be cases where the grantor, trustee, and beneficiary are the same person. In other cases, it’s possible for the grantor to name a trustee to manage the assets without having beneficiaries yet.
Here are important takeaways regarding ownership of trust assets:
To find out who owns the assets in a revocable trust, look to whoever is the trustee. If the trustee is also the grantor, then the grantor still owns and controls the assets. If the grantor assigned another person or entity as the trustee, the trust owns the assets, which are managed by the trustee.
This short video explains whether grantors should amend the trust if they buy additional assets and place them into the trust. Or in another instance, when the grantors decide to change the trustee or change the way assets are distributed to their beneficiaries. Guess which of these need trust amendments? Discover the answers in the video:
From the viewpoint of the IRS, the revocable trust has the simplest tax regimen. In a revocable trust, the grantor is responsible for paying any income generated by the trust. They must pay income tax on this during their lifetime.
Yes, but only if the trust is a revocable living trust where the grantor creates the trust for themselves. In this case, the grantor is also the beneficiary, so there are no legal hurdles, and they can sell the property.
In cases where there are other beneficiaries with interests in the property, selling the property can get complicated. For example, if the grantor does not have their records in order, the trust document may be difficult to locate. To sell any property within the trust, there must be a duly appointed trustee to manage the property and any transactions involving them.
Having a revocable trust comes with its benefits and disadvantages. There are tax and privacy issues to consider, along with privacy and cost concerns. Investors should weigh the advantages against the drawbacks when deciding to set up a revocable trust.
The probate process can be long and costly; it could take months before the beneficiaries even see the assets they are due to inherit. Under a revocable trust, the assets do not go into probate and are distributed to beneficiaries as set forth in the trust.
If the assets are part of a last will and testament, they enter probate. Details about the assets become a matter of public record. Not so with a revocable trust – assets do not go into probate and are not recorded in a court nor revealed to the public.
Aging and its accompanying health issues are a reality no one can reverse. Should the grantor suffer from an illness that leaves them disabled or chronically ill, a revocable living trust assigns a successor trustee to manage the assets. The trust also outlines how the assets will be distributed to beneficiaries.
If the grantor has a sizable estate before they get married, they can place the assets in a trust. A revocable trust can keep an individual’s assets separate from conjugal assets, which may be subjected to divorce proceedings.
While it’s possible to set up a revocable trust without a lawyer, there are other costs involved. Revocable trusts can be more expensive since they require re-titling assets with the trust as the owner of the assets. The only assets that do not require re-titling are insurance policies, annuities, and retirement plans.
Since the grantor still has control over the trust assets, the income still passes through them, and they must pay income taxes on this income. This contrasts with irrevocable trusts which require the grantor to relinquish ownership of the assets.
Unlike an irrevocable trust, a revocable trust hardly offers protection against creditors. This makes it riskier for financial advisers, real estate agents, doctors, or lawyers, whose profession is vulnerable to lawsuits. These professionals might want to consider asset protection trusts instead.
Learn more and try out some of asset protection trusts strategies for estate planning in this guide.
Typically, the successor trustee steps in to fulfill their duties after the grantor dies. But before the assets in the trust are turned over to the beneficiaries, these are the trustee’s tasks:
The revocable trust becomes an irrevocable trust once the grantor dies. The trustee can administer the trust terms on their own, but they are advised to hire an estate or trust attorney to assist them.
Revocable trusts are a useful estate planning tool but are not for everyone. Investors should consider their financial goals, their estate, and their wishes for the beneficiaries before settling on a revocable trust. There’s also no rule that says they cannot place some assets in a revocable trust and others in an irrevocable one – if these align with the investor’s goals and wishes.
Read and bookmark our Opinion section for insights from industry experts on trusts and other estate planning tools.
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