A revocable trust is a great tool for estate planning. If properly drafted and funded, the trust can avoid probate. It is private and provides the grantor the flexibility to add and subtract assets as he or she sees fit.
A trust has a grantor, a beneficiary, and a trustee. A grantor is the person who creates the trust. The beneficiary is the person who receives the property of the trust. A trustee is the person who manages the property of the trust. A trustee has fiduciary duties to the beneficiary. Basically a fiduciary duty is to act in another's best interest.
Many revocable living trusts have a grantor who is also the beneficiary of the trust during his or her lifetime. In other words, the grantor receives all the benefits of the property of the trust while living. The grantor has named another individual to be the beneficiary upon the grantor's death. Also, the grantor can act as the trustee of the trust during his or her lifetime, and upon the grantor's death another individual named as a successor trustee becomes responsible for the assets of the trust.
A revocable trust means that the grantor can revoke or amend the trust document. This provides the grantor with the flexibility to change the document as his or her life changes. For example, a grantor can name a different successor trustee if the prior successor trustee predeceases him/her. If the entire document no longer meets the grantors needs or goals, the entire document can be revoked.
A trust must contain assets to be a valid trust. This is called funding the trust. To fund the trust property must be titled to the trust. It is advisable to speak with an attorney to decide which assets should fund the trust. The types of assets that can fund the trust are real estate, cash, personal property, bank accounts, money market accounts, stocks, etc. As new assets are acquired by the grantor, the assets can be directly transferred to the trust upon acquisition.
A trust has many benefits. One of the benefits is providing for the care of minor children. The parents' assets that fund the trust can be used for the health, welfare, support and education of the minor child. Further, the parents can decide at what age it is appropriate for the children to manage their own inheritance. Many children mature at varying rates. Not every 22 year old has the same maturity level. A parent can decide that the trust will terminate once the child reaches 40 years of age, for example.
Another benefit of a trust is asset protection. A carefully drafted trust can prevent a beneficiary's creditors from receiving any of the trust assets so long as the assets are held in the trust. However, once the asset is taken out of the trust, the beneficiary's creditor can have access to it. Therefore, some grantors choose to have lifetime trusts for their children in order to protect assets.
Finally, some grantors choose to create a trust for estate tax planning. The trust can help avoid or minimize certain tax liabilities that the grantor wants to avoid.