What is a revocable living trust, and do you need one?

The term “estate planning” can sound like it’s something that’s meant for people with complicated family wealth. In reality, many estate planning tools can be useful in more common situations, including owning a home, running a business, or making it easier for family members to manage your affairs. A revocable living trust is one of those tools. It provides a framework for managing assets during your lifetime, preparing for incapacity, and transferring property after your death. 

Whether creating a revocable living trust makes sense for you will depend on your assets, family circumstances, state laws, and how a trust fits into your broader personal finances and estate plan.

A revocable living trust is a legal arrangement that you create during your lifetime to hold and manage assets. You can generally change its terms, add or remove property, or revoke the trust while you’re alive and have the legal capacity to do so.

Understanding what a revocable living trust is — including its definition and benefits — starts with learning about these three key roles:

1. Grantor: the person who creates the trust and transfers assets into it
2. Trustee: the person or entity responsible for managing the trust assets according to its terms
3. Beneficiary: the person or people who benefit from the assets held in the trust

One person can initially fill all three roles. For instance, you might create the trust, serve as trustee, and use its assets for your own benefit during your lifetime. You would also name the beneficiaries who will eventually receive the assets and a successor trustee who can step in if you become incapacitated or die.

Difference between a revocable trust and living trust

Is a revocable trust the same as a living trust? These terms are often used interchangeably, but not all living trusts are revocable. An irrevocable living trust can also be created during the grantor’s lifetime, but it operates under different rules around control, taxation, and asset protection.

Wondering how to set up a revocable living trust? The process is easiest to understand by looking at what happens from the time a trust is created through the eventual distribution of its assets. Here’s what that process typically looks like:

1. Create the trust. 
2. Transfer assets into the trust.
3. Manage them during your lifetime. 
4. The successor trustee steps in, when needed. 
5. Assets get distributed.

If you’re creating a revocable living trust, you’ll start by filling out a legal document that sets out the trust’s terms, including the trustee, successor trustee, and beneficiaries. Next, you’ll need to fund the trust. Depending on your estate plan, this might mean transferring or retitling real estate, bank accounts, taxable investment accounts, or eligible business interests.

If you serve as trustee, you can continue managing those assets according to the trust’s terms. If you become unable to manage your affairs, the successor trustee can typically take over management. After your death, they’ll administer and distribute the trust assets according to your instruction.

Do you need a revocable living trust? There isn’t a universal answer, but certain circumstances can make having one particularly useful:

• Handling homeownership: Homeowners may want property to pass according to trust terms without going through probate, especially if they own real estate in multiple states.
• Establishing business interests: Founders and business owners may use a trust to establish how eligible ownership interests should be managed if they become incapacitated or die, while maintaining a clear separation between business and personal finances.
• Managing complex personal finances: Trusts can also provide detailed instructions for blended families, continuity for people with significant investment accounts, and additional privacy because trust administration doesn’t typically become a public probate record simply because the grantor dies. A successor trustee can also manage trust assets during incapacity.

These circumstances can make a trust worth considering, but even if these scenarios apply to you, it’s up to you whether or not you choose to create one. Estate size, state law, family structure, asset types, cost, and personal preferences all affect the decision.

A will and a trust are both estate-planning tools that you can set up to direct what happens to assets after your death, but they work differently and are frequently used together.

Comparison chart: Revocable living trust vs. a will

Here’s how a revocable living trust and a will stack up when considering different factors.

A will can also handle matters a trust may not, such as nominating guardians for minor children. People with trusts commonly have a “pour-over” will that’s intended to direct certain assets left outside the trust into it at death, although those assets may still need to go through probate first.

The difference between revocable and irrevocable living trust structures largely comes down to how much control the grantor retains:

• Revocable trust: A revocable trust usually allows the grantor to amend or cancel it and continue controlling its assets. 
• Irrevocable trust: An irrevocable trust involves giving up significantly more control, and changing or terminating it may require additional legal steps.

Whether a trust is revocable or irrevocable also affects taxes and asset protection. For federal income tax purposes, a typical revocable trust is treated as a grantor trust while the grantor is alive, meaning its income is reported by the grantor. Certain irrevocable trusts may offer estate-planning or asset-protection benefits that a revocable trust doesn’t, depending on how they’re structured.

When comparing a revocable living trust vs. irrevocable living trust, control, taxes, asset protection, and flexibility are key considerations to discuss with an estate planning professional.

The advantages of a revocable living trust include continuity, privacy, and flexibility. Properly transferred assets can typically avoid probate, and a successor trustee can manage trust assets if the grantor becomes incapacitated. Because the trust is revocable, the grantor can also adapt it as assets, relationships, or priorities change.

The disadvantages of revocable living trusts are largely practical. Establishing one can cost more upfront than preparing a basic will, and creating the document is only part of the process. You’ll need to properly transfer assets into the trust. So, if you acquire new property, you’ll need to remember to also transfer it, if you’d like it to be included in your trust.

There are also limits to what these trusts can accomplish. A standard revocable trust generally doesn’t shield the grantor’s assets from creditors or remove those assets from the grantor’s taxable estate simply because they’re held in trust.

For people weighing the pros and cons of a revocable living trust, the decision typically comes down to whether the benefits justify the additional setup and maintenance for their estate.

By signing the trust document, you’ll establish the trust’s legal structure, but funding it allows that structure to work as intended. 

How you fund a revocable living trust depends on the assets involved. If you own real estate, you may need a new deed. Eligible bank or investment accounts may need to be retitled in the trust’s name. If you have business interests to account for, you might need to make changes to ownership records and review the relevant governing documents. To manage the trust’s money, you might also need to open a bank account in the trust’s name. 

Reviewing the trust after major changes — such as acquiring property, selling a business, moving to another state, or changes in family circumstances — can help you keep the plan aligned with your intentions.

Because trust and estate laws vary by state and individual circumstances, an estate planning attorney and tax professional can help you determine how to establish a revocable living trust and how to fund it appropriately.

Is a living trust the same as a revocable trust?

Often, but not always. A living trust is a trust that’s created during the grantor’s lifetime. Many are revocable, but living trusts can also be irrevocable.

Does a revocable living trust avoid probate?

Assets properly transferred into the trust can usually avoid probate. Assets left outside the trust may still be subject to probate depending on how they are owned, beneficiary designations, and state law.

Are revocable living trusts taxable?

During the grantor’s lifetime, a typical revocable trust is treated as a grantor trust for federal income tax purposes, so the grantor typically reports the trust’s income on their own tax return. Tax treatment could change after the grantor dies.

How much does a revocable living trust cost?

The cost of a revocable living trust varies based on the complexity of the estate and location. Attorney fees and fees for other estate-planning services can also add to the cost. Transferring or retitling certain assets may also involve costs.

Can you change a revocable living trust?

Yes, the grantor can typically amend or revoke the trust while alive and legally capable of doing so.

Does everyone need a revocable living trust?

No, some people can accomplish their goals with a will, beneficiary designations, establishing co-ownership of property, and other estate planning tools. For others, the desire to avoid probate, plan for incapacity, privacy concerns, or having significant assets to manage can make a trust worth considering.

A revocable living trust can provide a useful structure for managing what you own now and determining how those assets are handled in the event that you’re incapacitated and/or after your death. The benefits of establishing a living trust will depend on your assets, family circumstances, and what you want your estate plan to accomplish. Once you’ve created a trust, you’ll need to properly transfer your assets into it and manage the accounts over time. 

Ready to get started? Set up a dedicated trust account on Mercury Personal to manage your trust’s finances and give your trustees access.

Mercury is not a law firm and does not provide legal, tax, or financial advice. The information provided regarding trusts is for general informational purposes only and should not be construed as legal advice or relied upon as a substitute for consultation with a licensed attorney or qualified professional.