Revocable Trusts—Are They Right for You?

When it comes to planning for your financial legacy, concepts and strategies tend to be complicated and often overwhelming, so it’s only natural that people look for simple solutions to their not-so-simple problems. Revocable, or “living”, trusts are often touted as a cure-all for estate planning ailments, but no estate planning strategy is “one size fits all,” so it’s best to look carefully at your particular situation and make sure a revocable trust is really the best choice for your estate plan.

A revocable trust is one that can be adjusted or revoked as the settlor sees fit, which makes it a more flexible option than an irrevocable trust, which, generally speaking, cannot be changed after it has been established and funded with assets. People seeking to leave their assets to their loved ones are drawn to revocable trusts by a few key benefits, primarily being that revocable trusts do not have to go through the much-feared probate process, with all of the public having the capability to know the value of the person’s estate. Instead, by utilizing a revocable trust, upon the death of a settlor the assets pass quickly to a person’s loved ones and via a private agreement. Further, funding revocable trusts can prevent minor children from receiving a large monetary windfall upon turning 18 and can help avoid the complexity and difficulty of guardianship proceedings. Revocable Trusts can also be beneficial if the settlor later becomes disabled, allowing the successor trustee to continue utilizing the trust assets for the settlor’s benefit.

However, revocable trusts are not necessarily the right choice for everyone’s estate plans, so it’s important to know what living trusts can’t do in addition to what they can. First, revocable trusts do not provide creditor protection for the settlor—only the beneficiaries of the trust, after the death of the settlor. Additionally, Medicaid can “look through” revocable trusts in their determination of providing benefits, meaning that any assets in the trust are still counted by CMS when calculating the applicant’s resources, which must be less than $2,000 annually to qualify for Medicaid benefits. Additionally, as opposed to irrevocable trusts, revocable trusts do not provide a benefit to the settlor in terms of income taxes—the assets held in the trust will still be subject to taxation on the settlor’s personal income tax return.

For some individuals, a revocable trust may be the answer to some big estate planning questions. For others, it may not address what is needed. The most important thing when choosing estate planning tools and strategies is to know what your goals are and to ask an estate planner to help you find the solutions that will achieve your unique goals.

To discuss your goals and craft an estate plan tailored to your needs, contact McBrayer’s estate planning team today.  

Phillip A. Pearson is an Associate of McBrayer Law. His practice focuses primarily on estate planning and administration in addition to tax planning. He works in the firm's Louisville office and can be reached via email at ppearson@mcbrayerfirm.com or via phone at (502) 327-5400, ext. 2341.

This article does not constitute legal advice. Services may be performed by others.