A trust is a fiduciary arrangement through which you use a third party to hold and manage assets on behalf of one or more beneficiaries. A revocable living trust is the simplest and most common type of trust.
A trust is a document that establishes the terms by which certain assets will be handled. The creator of the trust is called the grantor or settlor. The grantor places trust assets into the trust and appoints a trustee to manage and distribute the trust assets according to the terms of the trust. The beneficiaries are those who benefit from the trust assets.
A revocable living trust provides rules for how your assets (the trust assets) are to be distributed when you die.
If you don't have a trust, your assets do not transfer ownership to your heirs without going through a court process called probate, which can be time consuming, expensive, and have uncertain results. It is also public. If you have a will, your estate will still have to go through probate to distribute your assets unless there is a trust.
The fact that the trust is revocable means you can change it after it is created (but see irrevocable trusts). You can move assets in and out of the trust, change the terms of the trust, or eliminate the trust.
Establishing a revocable living trust can also aid in keeping spousal property separate during marriage, and often includes power-of-attorney provisions for medical decisions.
Although there are several advantages of establishing a revocable living trust, there are several things they do not do:
- They do not protect the assets in the trust from creditors;
- They do not provide much in the way of tax benefits;
- They do not own any assets that you don't specifically title in the name of the trust; and
- They do not replace the need for a will (which is why usually a will is created at the same time as a trust)
Revocable living trusts are basic and provide some peace of mind for those with relatively small estates and no looming creditors. For those with higher-value estates, a revocable living trust would be just the beginning of a comprehensive estate plan.