What is a revocable trust?
Updated March 9, 2022
A revocable living trust (commonly known as a “revocable trust”) is a document that dictates how a person’s assets will be handed after they die. Assets that can be placed in a revocable trust include investments, bank accounts, items of great value and real estate.
Real Estate Investment Trust (REIT)
As with other living trusts, a revocable trust is created during the trustor’s lifetime, and assets placed in the trust are transferred to the designated beneficiaries after the trustor’s death. (Other terms the trustor can be known as include trustmaker and grantor.) Often used as part of estate planning, a revocable trust is utilized to supervise and protect the assets of trustors as they get older. But unlike other living trusts, a trustor can amend or cancel the terms of a revocable trust at any time, which is what gives it its name. Once the trustor dies, only then does the trust become irrevocable.
A deed must be executed to place a real estate property in a revocable trust. Credit: Scott Graham/Unsplash
A trustor can sometimes appoint a trustee to oversee the distribution of all or a portion of the trust’s assets. When assets are held by the trustee for the benefit of the trustor, this is called the principal of the trust. The powers given to a trustee allow them to make discretionary dissemination of the principal and income to the trustor, or the trustor’s family, if the trustor becomes unable to oversee their own affairs. The trust’s value is subject to change, either because of the trustee’s expenses or if the investment appreciates or depreciates in the financial markets. When a trustor dies, the trust then acts like a will, in that the assets are distributed to the beneficiaries as specified in the trust. Collectively, the assets make up the trust fund, and because a revocable trust has one or several beneficiaries, the trust therefore averts probate, which is the legal validation and distribution of a will’s assets.
Simply signing off on a trust document does not ensure the trust is funded. A trust is only funded when assets are transferred into the trust. This means changing the name of the titles on the deeds from an individual (or joint names) into the name of the trust, and assigning or changing the names of beneficiaries. While a trust can be funded once the trustor passes away, it is better if it is funded while they are alive. Doing so ensures the continuity of the trust’s asset management as well as financial support for the trustor should they become incapacitated in some way.
How do revocable trusts work when it comes to real estate?
For those who want to place real estate properties in revocable trusts, a deed must be executed. Most often this is a grant deed, which is the same kind of deed owners are given when purchasing a property. When transferring a deed into a trust, the property will be deeded to the name of the trust.
For properties with mortgages, the federal Garn-St. Germaine Act can be invoked. It states that certain properties can be transferred into a trust without activating a mortgage’s requirements that the loan first be paid. But the following requirements must be met: the trustor must reside at the property, the property must have a conventional (fixed-rate) mortgage and it should have five or fewer units. Placing a property into trust also does not trigger tax liability or reassessment for property tax reasons.
It is always best to consult with an attorney when wanting to place real estate into a trust, especially for properties that are not the trustor’s primary residence. For example, there are some title insurance policies that may cease covering properties once placed in a trust, whether or not the trustor lives there. So it is best to get in touch with the title insurer to see if coverage will not be affected once the property is transferred into a trust.
What are the pros and cons of revocable trusts?
There are many advantages to forming a revocable trust. If the trustor has health issues stemming from advanced age, a revocable trust lets their chosen trustee take control of the principal. For trustors who own real estate outside of the state where they reside, and that property is included in the trust, then the property will not be subject to probate upon death, a costly and often time-consuming process. Revocable trusts allow trustors to designate any individual or company, including those who are not relatives and live out of state, to be the main administrator of assets after the trustor’s death.
If the trustor does not trust the financial judgment or aptitude of one of their beneficiaries, then a trust can be designed so that the beneficiary will receive a set sum on an ongoing basis. Beneficiaries who are minors can have their assets also held in the revocable trust until they are of legal age, a more ideal option than being assigned a court-appointed guardian.
But there are a few disadvantages as well. Any asset transferred to the trust must be reregistered in the name of the revocable trust in order to bypass probate proceedings. Also, the trustor’s estate needs to be monitored on a yearly basis to make sure that trust’s objectives are being served. There are no tax advantages to trustors who opt for revocable trusts, and creditors can also still access assets in a revocable trust. And any assets not assigned to the revocable trust must still be covered by a will so as to avoid probate.