Revocable Trust

Revocable Trust

A revocable trust is an estate-planning tool created during a person’s lifetime that can be changed, amended, or revoked by the grantor (the person who establishes the trust). The grantor typically funds the trust with assets to be managed for their benefit while alive and distributed to named beneficiaries after death. Because the trust itself continues to exist, assets properly placed in a revocable trust generally avoid probate.

How it works

• The grantor funds the trust by retitling assets (bank accounts, real estate, investments) into the trust’s name.
• During the grantor’s lifetime the trust is usually managed by the grantor as trustee; a successor trustee is named to step in if the grantor becomes incapacitated or dies.
• Income from trust assets is available to the grantor while they are alive.
• Upon the grantor’s death the revocable trust typically becomes irrevocable and the successor trustee distributes assets to beneficiaries according to the trust’s terms.
• Assets not transferred into the trust still pass according to the grantor’s will and may be subject to probate unless otherwise designated.

Advantages

• Flexibility — the grantor can change beneficiaries, terms, or revoke the trust while competent.
• Probate avoidance — properly funded trusts generally bypass probate, speeding distribution and preserving privacy.
• Incapacity planning — a successor trustee can manage trust assets if the grantor becomes disabled, avoiding court-appointed guardianship.
• Control over distributions — the trust can direct how and when beneficiaries receive assets (useful for minors or spendthrift beneficiaries).

Disadvantages

• No immediate tax benefit — assets in a revocable trust remain part of the grantor’s taxable estate for estate and gift tax purposes.
• No creditor protection during the grantor’s lifetime — the grantor retains control and creditors can reach trust assets.
• Upfront and ongoing costs — establishing and funding a trust typically costs more than a simple will and requires maintenance (e.g., retitling new assets).
• Risk of incomplete funding — if assets aren’t transferred into the trust, they may still go through probate; many people also maintain a “pour-over” will to capture remaining assets.

Revocable living trust

A revocable living trust is simply a revocable trust created during the grantor’s lifetime. It’s commonly used to manage assets, provide for incapacity, and avoid probate. Unlike irrevocable trusts, it does not provide creditor protection or remove assets from the grantor’s taxable estate.

Revocable vs. Irrevocable trusts — when to use each

• Revocable trusts are best when you want flexibility, privacy, and smoother transfer of assets at death without changing tax exposure or creditor risk.
• Irrevocable trusts are used when the goal is to remove assets from the grantor’s estate for tax planning or to protect assets from creditors; once funded, irrevocable trusts generally cannot be changed.

What happens when the grantor dies

When the grantor dies, a revocable trust commonly becomes irrevocable. The successor trustee is responsible for collecting trust assets, paying debts and expenses, and distributing assets to beneficiaries per the trust document. Because the trust holds title to the assets, they typically avoid probate, though the assets remain part of the grantor’s estate for estate tax calculations.

FDIC insurance on trust accounts

Under current FDIC rules (effective April 1, 2024), bank deposits held in the name of a trust are insured using a single “trust account” category. Coverage is generally:
* Up to $250,000 per beneficiary, per FDIC-insured bank.
* Up to a maximum of five eligible beneficiaries for standard pass-through coverage — for example, a trust with three eligible primary beneficiaries would be insured up to $750,000.
Eligible beneficiaries include living persons and qualifying charities; contingent or successor beneficiaries may be treated differently. Check FDIC guidance or your bank for specifics and documentation requirements.

Key takeaways

• A revocable trust provides flexibility and can streamline asset transfer and management during incapacity and after death.
• It does not remove assets from the grantor’s taxable estate or shield them from creditors while the grantor retains control.
• Proper funding (retitling assets) and periodic review are essential to realize probate-avoidance benefits.
• Consider a revocable trust as part of an overall estate plan; consult an estate-planning attorney to match trust type and terms to your goals.