A living trust, often called a revocable trust, is becoming favored by retirees as they begin to make end-of-life arrangements.
Trusts are a legal device in which property is transferred to the trust and governed according to the rules of a contract. A trustee manages the property under these rules for the financial benefit of other people.
Trusts can be made during a person’s lifetime or they can be established as directed by a will. If it is created during a trustmaker’s lifetime, it’s called a living trust.
What is a revocable trust?
A revocable, living trust is created during the trustmaker's lifetime in which the trustmaker transfers the title of a property to the trust. The trustmaker serves as the trustee and can remove the property, modify the trust or revoke the trust entirely while the trustmaker is alive.
Many people choose to create these trusts because when they die, the property in the trust can avoid probate. They prefer the privacy of avoiding probate – contested wills are made public while those that avoid probate are not.
A revocable trust won’t appease a disgruntled heir. Someone left out of a will can challenge a trust as easily as they can challenge a will.
The process on how creditors can gain access to property is different as well. If there are creditors, they must petition a court to get access to the trust’s property.
Assets in trusts become vulnerable if you name the beneficiary as the trustee or add new beneficiaries to the trust. Trust assets can then become part of divorce settlements and credit payments.
An irrevocable trust
While a revocable trust can be changed or altered, an irrevocable trust cannot be modified, changed or revoked after it has been created. No one, including the trustmaker, can change an irrevocable trust after it has been created.
This means that you no longer own the property – your trust owns it. While this is limiting, it does have advantages. Creditors cannot attach themselves to the property since you don’t own it anymore. It doesn’t add to your estate tax since it’s no longer a part of your estate.