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What is a Revocable Living Trust?
A Revocable Living Trust is an estate-planning document that allows you to place assets or property into a trust.
Trusts are legal entities that hold assets for beneficiaries to inherit eventually. As its name suggests, a Revocable Living Trust is one that you can amend or revoke at any time.
One of the main reasons people create a Revocable Living Trust is so they can seamlessly transfer assets to beneficiaries after passing away. This is because a Revocable Living Trust avoids the public probate process—which can take months or years. As such, your assets get distributed to your beneficiaries much quicker.
However, this estate planning tool also serves other purposes. Like with a Power of Attorney, a Revocable Living Trust helps protect your interests in situations where you cannot represent yourself. By appointing a trustee, you can give someone permission to control your trust with your best interests in mind.
Who are the parties in a Revocable Living Trust?
- Settlor: The person who sets up the trust and transfers assets into it.
- Trustee: The person who controls the assets in the trust. The settlor can appoint themself as the trustee, but they’ll also need to appoint another trustee to co-manage the trust with them.
- Successor trustee: If the trustee becomes incapacitated, the successor trustee is the person who manages the trust instead.
- Beneficiaries: The people or organisations that stand to inherit the trust assets.
What are the pros and cons of a Revocable Living Trust?
Advantages
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Disadvantages
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Revoke or amend it: Revocable Living Trusts are flexible in nature. You can amend them as needed to adapt to life's changes. For example, if you get divorced or acquire new assets, you can update the terms of the trust to reflect your new circumstances.
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Needs ongoing maintenance: When your financial or family circumstances change, you have to be diligent in amending your Revocable Living Trust to reflect your wishes. Failure to do so could result in complications for your beneficiaries.
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Avoid probate: Trust assets can bypass the probate process. This helps ensure a seamless and speedy transfer of ownership to your beneficiaries. (You don’t have to place your entire estate into a trust to avoid probate. Instead, consider certain assets such as a family home.)
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Extra steps to retitle property: To include assets in your Revocable Living Trust, you must transfer asset titles to the name of the trust. This process can take time and involve additional costs.
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Ensure your privacy: Probate court records are public records. Typically, anyone can access the court records of your Last Will’s distribution. In contrast, Revocable Living Trusts are not public. So, you can ensure privacy for yourself and your beneficiaries.
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Limited protection from creditors: Assets in a Revocable Living Trust aren’t always protected from creditors. You still have beneficial ownership of the assets within your Revocable Living Trust, as they’re used for your benefit while you’re still alive. So, these assets could be claimed by creditors.
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Plan for incapacity: If you appoint yourself as the trustee of your trust and name someone else as your successor trustee, you ensure their control over the trust's assets if you’re incapacitated—without having to seek court approval.
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What are the best assets to put in a trust?
Generally, people place assets with high monetary value into Revocable Living Trusts. Some examples include:
- Business interests (e.g., shares in a company or partnership)
- Valuable personal property (e.g., jewellery, artwork, and antiques)
- Securities such as stocks, bonds, or mutual funds
- Bank accounts, cash, and notes payable
- Investments
- Real estate
Can I put my house in a trust?
Putting your house in a Revocable Living Trust helps protect it from probate, certain taxes, and those that may have a legal claim against your beneficiaries.
While the house is in the trust, it is under the control of your trustee. This also helps ensure the property gets managed according to your wishes.
Although you can use LawDepot’s Revocable Living Trust form to list your house as a trust asset, you must complete the transfer of ownership by filing the correct forms with HM Land Registry. You can hire a solicitor or conveyancer to help you with this, or you can do it yourself.
Keep in mind, there’s a cost to transferring property—even if it’s as an inheritance. This price varies based on the value of the property and the method you use to apply for registration.
What assets should not be in a trust?
Typically, property with low monetary value or assets that need to be insured, like vehicles, are not placed into trusts.
Who owns the property in a trust?
As the settlor, you still own the property within a Revocable Living Trust. Despite transferring an asset's title to the name of your trust, the asset is still considered part of your property when you use a Revocable Living Trust.
This is because you can change ownership of the property, terminate the trust at any time, and control the trust's contents as a trustee. The settlor also retains the benefit of the property while they’re still alive. So, even if they're not the trustee, the property is used for their benefit (e.g., they can earn share dividends).
That said, you must pay taxes on any income your Revocable Living Trust generates during your life.
Do you pay inheritance tax on trust assets?
Although some trust assets may be excluded from inheritance taxes, those that are in a Revocable Living Trust are not. This is because technically these assets still belong to the settlor.
Generally, you must pay inheritance tax on assets valued over £325,000, at a rate of 20%. This rate applies if the trustee pays the inheritance tax. However, the rate increases if the settlor pays because it’s seen as an increased loss from their estate.
What’s more, there may be situations that reduce the £325,000 limit, or that cause you to pay tax twice on a trust asset (i.e., double taxation).
The bottom line is: inheritance tax laws are complex. If you have further questions, you can refer to GOV.UK’s Guide to Trusts and Inheritance Tax or consult a tax specialist.
What are the other tax implications of creating a trust?
You must pay taxes at several points in the lifecycle of a living trust (i.e., a settlor-interested trust), as it’s subject to unique tax rules designed to prevent tax avoidance.
For instance, capital gains tax may be payable when assets are taken out of the trust and the total taxable gain is above the Annual Exempt Amount.
Income tax is also payable on income generated by the trust at variable rates. Usually, the trustee pays the income tax but, ultimately, the settlor is responsible for the income tax and for reporting it to HM Revenue and Customs (HMRC).
When filling out LawDepot’s Revocable Living Trust form, we’ll provide some general information about tax implications. However, it’s best practice to seek advice from a tax specialist before creating a living trust.
Should I notarize my Revocable Living Trust?
The law in the U.K. does not require you to notarize your Revocable Living Trust. However, you should sign the document in front of at least one witness. This witness:
- Must be the legal age of majority
- Cannot be your trustee or beneficiary
- Cannot be the spouse of a beneficiary
How does a Revocable Living Trust compare to a Last Will and Testament?
Both of these documents are useful tools for planning your estate. You can use either document to designate assets to your beneficiaries. However, the main difference between the two is that a Last Will only functions after your death.
Our Revocable Living Trust template gives you the option to include a Pour-Over Will. This is a special type of Last Will and Testament that works complementary to your Living Trust. For example, if you acquire more assets without updating your Living Trust, this document transfers that missed property into your trust when you die. This way, the assets get distributed as specified in your Living Trust.
However, if the assets in your Living Trust (transferred in the last seven years) and any assets outside of the trust are worth more than £325,000, then you may want to create a Last Will and Testament for the assets outside of your Living Trust instead of a Pour-Over Will.
If you create a Pour-Over Will your estate may have to pay inheritance tax both when the assets are transferred into your Living Trust and when they are distributed to your beneficiaries. When distributing gifts and assets with a standard Last Will, you only pay tax when the beneficiaries receive their inheritance.