A revocable trust is a powerful estate planning tool that can help you maintain control over your assets while ensuring a smooth transition for your beneficiaries, but there are some things it does not do. Knowing the potential drawbacks and which assets to include or exclude in the trust, if you create one, is crucial for effective estate planning! 

Key Takeaways:

  • Revocable trusts can help you avoid probate and maintain privacy.
  • The disadvantages of a revocable trust include not having asset protection or tax benefits.
  • Real estate, bank accounts, and investment accounts are good candidates for assets to place in a revocable trust. 

When it comes to estate planning, a revocable trust is one of the most powerful and flexible tools available. It allows you to maintain control over your assets during your lifetime while ensuring a smooth transition for your heirs after you pass away. 

However, like any estate planning tool, revocable trusts have both advantages and disadvantages depending on your unique goals. Not all assets are best suited for inclusion in a revocable trust. 

Below, we break down the key benefits and drawbacks of a revocable trust, along with recommendations for which assets should and should not be placed in one!

What is a Revocable Trust?

A revocable trust, sometimes referred to as a living trust, is a legal entity created to hold ownership of an individual’s assets. The person who creates the trust, known as the grantor, has full control over it during their lifetime. The trust is “revocable” because the grantor can modify, amend, or completely dissolve it at any time. Upon the grantor’s death, the trust becomes irrevocable, and the designated trustee manages and distributes the assets according to the terms outlined in the trust document.

Many people use revocable trusts as a key component of their estate plan because of the numerous benefits they offer. However, they also come with certain limitations that must be considered when deciding if this approach is right for you.

Advantages of a Revocable Trust

1. Avoids Probate

One of the biggest benefits of a revocable trust is that it allows your estate to bypass the often time-consuming and costly probate process. Assets held in the trust can be distributed to beneficiaries without court intervention, saving time and legal fees. Probate can take months or even years to complete, and it can significantly reduce the value of your estate due to attorney fees and court costs.

2. Maintains Privacy

Unlike a will, which becomes a matter of public record once probated, a revocable trust remains private. This means that the details of your assets and who receives them will not be disclosed publicly. If privacy is a concern for you and your family, a revocable trust can provide a significant advantage.

3. Provides Flexibility and Control

As the grantor, you retain full control over the assets in the trust during your lifetime. You can add or remove assets, change beneficiaries, or dissolve the trust altogether if your circumstances change. This level of flexibility makes it an attractive option for individuals who may need to update their estate plan due to life events such as marriage, divorce, or the birth of children.

4. Ensures Continuity in Case of Incapacity

If you become incapacitated, your designated trustee can step in and manage the trust’s assets on your behalf. This avoids the need for court-appointed guardianship or conservatorship, which can be a lengthy and expensive process. Your successor trustee can immediately take over management of the trust, ensuring that bills are paid, investments are managed, and your financial affairs remain in order.

5. Facilitates a Smooth Transfer of Assets

Since a revocable trust avoids probate, beneficiaries can receive their inheritance much faster compared to assets distributed through a will. This is especially important if you own multiple properties in different states, as probate would need to occur in each state separately. A revocable trust simplifies this process by consolidating asset distribution under one legal entity.

Disadvantages of a Revocable Trust

1. Does Not Provide Asset Protection

Unlike irrevocable trusts, revocable trusts do not shield assets from creditors or legal judgments. Because you retain control of the assets, they are still considered part of your estate and can be subject to lawsuits, divorce settlements, or other financial liabilities.

2. More Expensive to Set Up and Maintain

Establishing a revocable trust involves higher upfront costs than a simple will. Additionally, ongoing maintenance, such as transferring assets into the trust and updating it as needed, requires effort and potential legal assistance. While the long-term benefits may outweigh the initial cost, individuals should consider their financial situation before committing to this option.

3. No Estate Tax Benefits

Assets in a revocable trust remain part of your taxable estate. This means that if your estate is large enough to be subject to estate taxes, a revocable trust does not provide significant tax advantages. For those looking for tax-saving strategies, other types of trusts, such as irrevocable trusts, may be more appropriate.

What Assets Should Be Placed in a Revocable Trust?

To maximize the benefits of a revocable trust, consider placing the following assets inside it:

  • Real Estate – Your primary residence, vacation homes, and rental properties can be transferred into the trust to avoid probate.

  • Bank Accounts – Checking, savings, and money market accounts can be placed in a trust for easy access by your trustee in case of incapacity.

  • Investment Accounts – Stocks, bonds, and mutual funds that are not held in retirement accounts are good candidates.

  • Business Interests – If you own a business, transferring your ownership interests into a trust can ensure continuity.

  • Personal Property – Valuables such as jewelry, collectibles, and art can be included in a revocable trust.

What Assets Should NOT Be Placed in a Revocable Trust?

Some assets are better left outside a revocable trust due to tax implications or restrictions:

  • Retirement Accounts (IRA, 401(k), 403(b)) – Placing these accounts in a revocable trust can trigger immediate taxation. Instead, consider naming the trust as a beneficiary if appropriate.

  • Health Savings Accounts (HSA) and Medical Savings Accounts (MSA) – These accounts cannot be transferred into a trust, but can have designated beneficiaries.

  • Vehicles – Unless the vehicle is of high value (e.g., a collectible car), it may not be worth transferring into a trust due to registration complexities.

Is a Revocable Trust Right for You?

A revocable trust offers numerous advantages, from avoiding probate to maintaining privacy and ensuring smooth asset management in case of incapacity. However, it requires careful planning and upkeep. Understanding which assets to include and exclude will help you make the most of your estate planning strategy.

KEYTLaw is here to assist you if you're thinking about creating a revocable trust or would like to investigate other trust alternatives. In any case, our knowledgeable estate planning lawyers will make sure your assets are safeguarded and your desires are carried out. For a free consultation, get in touch with our staff right now!