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Revocable trust

Revocable trust is a money term you need to understand. Here’s what it means.

What is a revocable trust?

A revocable trust, also known as revocable living trust, is a trust that can be modified or altered by the trustor or grantor (the person who creates the trust) any time while he is still living.

Deeper definition

A revocable trust is a legal document that places the grantor’s assets into a trust during his lifetime and then distributes them to his heirs or beneficiaries after his death. The grantor can change or cancel the trust while he is still alive.

A revocable trust is also a way of ensuring that estates will be passed along to the grantor’s beneficiaries, especially if the grantor suddenly dies or becomes incapacitated.

Most people use revocable trust to avoid probate court. Probate is a legal process in which a will is “proved” in a court and recognized as a valid public document. Probate can be time consuming and expensive, and is usually more of a burden than a help.

One disadvantage of a revocable trust is that it does not cover the entire assets of the grantor. It only covers assets or properties that are specified in the trust. This means that if the grantor wants to manage or convey a large portion of his estate or his entire estate, a different type of document may need to be created, such as a will.

Revocable trust example

Katrina has an estate worth $80 million, and she sets up a revocable trust for the benefit of her two children. Katrina transfers ownership of her estate into the trust, naming herself as the trustee and a trust company as her successor trustee.

After a few years, Katrina changes the trust. Rather than equally distributing the estate to her children, she decides to transfer 75 percent of it to her eldest child and the remaining 25 percent to her youngest child.

Five years later, she passes away and, because she’s no longer able to make a decision regarding the trust, it becomes irrevocable. The successor trustee takes over management of the trust, distributing the estate to Katrina’s children as specified in the terms of the trust.

Although Katrina can name herself as trustee of her own trust during her life, she should have a successor trustee to act when she is deceased or becomes disabled.

Why have a revocable living trust? Find out the reasons why you may or may not want to use this estate-planning tool versus a will.

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