One of the most common questions from clients when discussing the structure of an estate plan is, “What is a revocable trust - and do I need one?”  The first part of this question is easy to address, and the second part is more nuanced, requiring a careful weighing of numerous variables.  In this two-part blog, we will address what a revocable trust is and is not (Part I) and then the factors which merit consideration of a revocable trust as part of an estate plan (Part II).

What is a Revocable Trust?

A revocable trust is a legal document wherein an individual grantor/settlor establishes a “bucket” or “holding tank” for certain assets to reside in and which are subject to the control of a trustee who is bound to follow the terms and rules written in the document.  

During the individual grantor/settlor's life, assets are often transferred to the legal name of the trust.  Most grantors/settlors will name themselves as sole trustee of their revocable trust, in order to maintain control over their assets for as long as they are alive and have legal capacity. 

Very often, the revocable trust is designed to also work in conjunction with a will; that is, at the grantor/settlor's death, a will often “pours over” any assets that were not transferred to the revocable trust during the grantor/settlor's life.

What a Revocable Trust is NOT

There are misconceptions that should be corrected when thinking about what a revocable trust is not.

1. A revocable trust does NOT affect the individual grantor/settlor's ability to use, manage, access, and control assets inside it, as long the grantor/settlor is still alive and has legal capacity.
2. A revocable trust is NOT a separate taxpayer during the individual grantor/settlor's lifetime. That is, the revocable trust will use the grantor/settlor's social security number until the grantor/settlor dies; thus, all income and expense items are reported on the grantor/settlor's own tax return.
3. A revocable trust does NOT provide the individual grantor/settlor with creditor protection. In other words, if the grantor/settlor is sued, the assets inside the trust are still subject to the claims of the creditors.  (This is not true for remainder beneficiaries who do, in fact, receive creditor protection for assets left to them in trust by the grantor/settlor.)
4. A revocable trust does NOT move assets outside of the individual grantor/settlor's taxable estate. To permanently remove assets from a taxable estate, usually an irrevocable trust is established and requires that the individual grantor/settlor surrender certain aspects of control for the assets transferred to it.

Our attorneys routinely discuss the above concepts with clients to help them understand revocable trusts.  Contact us to learn more about revocable trusts in North Carolina and South Carolina, and keep reading in upcoming Part II of this blog for the “super powers” of revocable trusts.