What Is a Revocable Living Trust?

by Neal Frankle, CFP ®

What is a revocable living trust? A revocable living trust is a document that helps you protect your assets and your family. It spells out what you want to happen with your assets once you can’t decide or communicate anymore – in other words, when you are either incapacitated or deceased.

You set up your revocable living trust while you still have capacity, usually with an attorney. But if your situation is simple enough, you can set up your living trust yourself.

Why do they call it “revocable”? Because you can change anything and everything about your trust up until the moment you can’t make decisions or communicate. Think of your living trust just like your life insurance beneficiary form. All you need is a signature and poof…everything changes. That’s a really nice feature and a wonderful threat to hold over your children’s heads to make sure they treat you well. :)

Why might you set up a trust?

The main benefit of using a trust is that it provides direction on what to do with your assets once you’re gone. If you have accounts in joint tenancy or have named beneficiaries for your accounts, you may not need a trust. That’s because these forms of ownership direct where the money is supposed to go once you are no longer with us.

But if at some point your money is in your name alone (you don’t have any named beneficiaries) and you die, the court system will decide what to do with your money through probate. What is probate? This is the system that appoints the courts to interpret your will, if you left one, or use their own rules if you left us without a will. Probate is expensive and takes a great deal of time. Lawyers love it. The rest of us don’t.

My advice is to avoid forcing your family to use probate when you go. The best way to do that is to make sure you have a trust or name beneficiaries on your accounts.

The trust also contains health power directives to give us instructions on what to do with you if you are still living but ready to stop. That’s another handy feature.

Who doesn’t need a trust?

I am not an attorney of course, and I recommend you speak with your legal advisor before making any decisions about this. But there are some people who really don’t need a trust.

If you have modest assets, you may not need a trust. Estate taxes aside, if everything you have has either a joint owner (joint tenant) or has a beneficiary (retirement account or TOD account), your money will flow to your beneficiary without probate.

That being the case, the only thing you have to worry about is a health power of attorney. You can get this done very inexpensively as a stand-alone document without going through the expense of setting up a revocable living trust.

If you decide to go this route, I’d do two things:

  1. Make sure that everything – and I mean everything – has a beneficiary named
  2. Have a will just in case.

Have you set up a living trust? Why or why not?

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