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If you've accumulated a sizable estate and are looking for estate-planning tools that will allow your assets to privately and seamlessly transfer to your heirs, then a revocable trust may be a solution to consider.
Understanding revocable trusts
The greatest benefit of a revocable trust is that it simplifies the estate-planning process. When a person without a trust passes away, their property is disposed of by a probate court. Not only is this a time-consuming and often costly process, it also generates a public record of the property being passed to heirs.
By using a revocable trust, however, you can cut this process off at the proverbial pass. Any property transferred to a revocable trust is no longer considered a part of your probate estate. It will pass to your heirs in the manner laid out in the governing trust documents without the need of a court's intervention. This avoids the creation of a publicly available document outlining your assets and their disposition.
Let's say, for instance, that you have $2 million in assets split between $500,000 in cash and $1.5 million in stocks. If you transfer the stocks into a revocable trust, you can name the beneficiaries who will receive them at your death. As a result, only the remaining cash would pass through the probate process and be distributed according to your will or, in the absence of a will, your state's inheritance laws.
Making revocable trusts even more attractive is the ease with which they can be set up. While it's generally best to get an attorney's help in doing so, there are multiple examples of the requisite language available online. The most important thing to keep in mind is that you need to formally transfer the assets to the trust and designate who the trustee and beneficiaries are -- in the case of revocable trusts, these are all generally the grantor until he or she passes away, at which point a successor trustee distributes the trust's assets to the residual beneficiaries.
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Two downsides to revocable trusts
That being said, there are two downsides to using a revocable trust as opposed to an irrevocable one. First, unlike an irrevocable trust, a revocable trust doesn't protect the assets therein from the grantor's creditors or legal liability. Because a transfer to an irrevocable trust is, well, irrevocable, its assets are no longer owned by the grantor. Thus, if the grantor incurs a legal liability or owes money to a creditor, those assets can't be used to satisfy the debt any more than, say, the assets of the grantor's neighbor.
And second, while a revocable trust allows the assets therein to avoid probate, they are still formally a part of your estate and thus incur estate taxes. Again, just for the sake of comparison, because the assets in an irrevocable trust are no longer yours, they neither go through the probate process nor are they subject to estate taxes.
The net result is this: If you're simply looking for a legal device that will assist your estate-planning process without affording any immediate benefits or protection, then a revocable trust may be the way to go. This is particularly true if you want the flexibility offered by the power to revoke the legal entity. But if you also want to protect your assets while you're still alive, and you don't mind relinquishing the right to later change your mind and undo the transfer, then the best course may be an irrevocable trust instead.
The article What Is a Revocable Trust? originally appeared on Fool.com.
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