A revocable trust, also called a living trust, is a legal arrangement in which an individual transfers some of their assets into a trust for management and use during their lifetime. Revocable trusts offer numerous benefits, but they also have some downsides that individuals should consider before deciding whether to establish one. Learn about a revocable trust, its advantages compared to other financial planning arrangements, and its most common uses. If you would like to explore the benefits of revocable trusts in Tennessee, please consider scheduling an appointment with Shepherd and Long, PC by calling 865-982-8060.
What Are the Downsides of a Revocable Trust?
No matter the type of trust, it is a legal agreement between the trustee and grantor. According to the Internal Revenue Service, a trust is established under state law, with the grantor creating the agreement and transferring assets into it. Revocable trusts can have some drawbacks.
Costs of Establishing a Revocable Trust
One of the main disadvantages is the cost involved in setting it up and maintaining it. Many people prefer to establish a trust with the benefit of a financial planning attorney’s advice and assistance, which can be expensive.
Costs of Transferring and Managing Assets
Additionally, the trust must be properly funded by transferring assets, which may involve more legal and administrative costs. Unlike a Last Will and Testament, which typically must go through probate, a revocable trust avoids probate. However, the trust must be managed and administered during the grantor’s lifetime and after their death. Trustees must handle the ongoing management of the trust, including ensuring proper accounting, record-keeping, and distribution of assets. This process can be time-consuming and expensive.
Limited Privacy Protections
Privacy concerns may also be a downside of a revocable trust. Unlike a will, a revocable trust usually remains private. However, in some situations, such as a legal dispute, the trust may be scrutinized and become public record. For individuals who prioritize absolute privacy, a revocable trust may not offer the desired level of confidentiality.
Limited Asset Protections
Additionally, a revocable trust does not necessarily provide comprehensive asset protection in the same way that certain irrevocable trusts do. While a revocable trust allows the grantor to maintain control and access to the assets during their lifetime, it does not shield those assets from creditors or legal claims.
What Are the Advantages of a Revocable Trust vs. a Will?
While revocable trusts do have some drawbacks, they offer benefits that make them appealing estate planning tools for many people. One of the most significant advantages is the ability to avoid probate. Probate is a complex and often costly court-supervised process that:
- Validates a will
- Settles debts and taxes
- Transfers assets to beneficiaries
Revocable Trust Flexibility
Flexibility is another advantage of a revocable trust. A revocable trust can be modified or revoked during the grantor’s lifetime. If circumstances change, such as by the acquisition of new assets or a change in preferred beneficiaries, the grantor has the flexibility to modify the terms of the trust.
Revocable Trust Incapacity Planning
Revocable trusts can also provide incapacity planning benefits. The grantor can designate a successor trustee to manage the assets on the grantor’s behalf in the event that they themselves become incapacitated. Many times, this can be essential for ensuring the seamless management of assets and financial affairs and avoiding the need for a court-appointed guardian or conservator.
What Assets Should Not Be Placed in a Revocable Trust?
When transferring assets into a revocable trust, individuals should consider which assets are best suited for this type of ownership. While many assets can be transferred, retirement accounts like 401(k)s and IRAs should generally not be included in a revocable trust due to tax implications and beneficiary designation rules. Additionally, life insurance policies may not be ideal for a revocable trust since proceeds are already designed to be paid directly to named beneficiaries and bypass probate. Designating beneficiaries on the policy can provide a more straightforward process for the distribution of assets.
Some assets, such as certain trusts established for tax planning, may not be suitable for a revocable trust due to complex tax implications. These assets may be subjected to an estate tax from the Internal Revenue Service. If you have questions about your assets and the most advantageous trusts for your particular circumstances, consider consulting an experienced attorney to determine the most appropriate ownership structure for these assets. Reach out to Shepherd and Long, PC, to learn more about your options.
What Is a Revocable Trust Most Often Used For?
A revocable trust is a versatile estate planning tool that can serve various purposes depending on an individual’s goals and circumstances. Some of these may include:
Avoiding Additional Court Proceedings
One of the primary uses of a revocable trust is to avoid probate. By transferring assets into a trust, individuals can ensure a seamless transfer of assets to their beneficiaries without the need for court intervention.
Additionally, a revocable trust can be used for incapacity planning. By designating a successor trustee, individuals can have their assets managed on their behalf if they become incapacitated. This allows for the seamless management of financial affairs and can avoid the need for guardianship or conservatorship proceedings.
Support for Loved Ones
Another common use of a revocable trust is to provide for the ongoing care and support of loved ones, particularly in situations involving minor children or individuals with special needs. The trust can include specific instructions on how assets should be managed and distributed for the benefit of the beneficiaries, ensuring their financial security.
Protecting Assets After Divorce or With Remarriage
Revocable trusts can also be used to plan for blended families, in which individuals have children from previous marriages or relationships. By establishing a trust, individuals can designate how their assets should be distributed to ensure that both current spouses and children from previous relationships are provided for in a manner that aligns with their wishes.
Reach Out to a Tennessee Estate Planning Attorney Today
While a revocable trust offers numerous advantages, including flexibility, incapacity planning benefits, and the avoidance of probate, it is essential to consider the potential downsides, such as the cost of establishing and maintaining the trust, the complexity of administration, and a revocable trust’s limited asset protection. The decision to establish a revocable trust should be based on an individual’s specific circumstances and goals. If you would like to learn more about the types of trusts available in Tennessee, please consider scheduling a consultation with Shepherd and Long, PC by calling (865) 982-8060.