A revocable trust, also known as a living trust, is a means of allowing your loved ones to avoid probate. You remain in control of your assets during your lifetime and specify how the assets are distributed upon your death. You are not required to include all your accounts in the trust, but any assets you choose not to place in the trust may be subject to probate.
How a Revocable Trust Works
A revocable trust is a written agreement that names responsible parties and beneficiaries. Typically, you name yourself or your spouse as the trustee so that you can control the assets while you are living. The designated successor trustee steps in when the trustee dies. You fund a trust by retitling assets in the name of the trust. Instead of you owning the assets, the assets are owned by the trustee for the benefit of the beneficiary. Most people tend to name themselves as the first beneficiary. This gives you the power to spend as you please throughout your lifetime. When you pass away, the successor trustee has the immediate authority to manage and distribute the assets to the other beneficiaries.
If your main goal is to avoid probate, you do not have to place all assets in the trust. A home titled as "tenants by entirety" or "rights of survivorship" automatically passes to the other named party. Assets with designated beneficiaries, such as an IRA, annuity or bank account, also bypass probate. In some states, probate isn't necessary to transfer a vehicle to your beneficiaries. If you choose to place vehicles in the trust, you are required to pay title fees and taxes, which can add up fast.
Assets to Include in the Trust
Assets that are not exempt from probate should be titled to the revocable estate. This includes secondary or investment homes, land, business interests, money market accounts, stocks, bonds, mutual funds, royalty contracts, patents, copyrights and even precious metals, gems and antiques.
Asset to Keep Out of the Trust
Health savings accounts and medical savings accounts can't be retitled in the name of a revocable trust. However, you can designate the trust as a beneficiary. You should also avoid placing bank accounts that frequently move money, such as a checking account, in the trust. Avoid naming the revocable trust as a life insurance beneficiary. Life insurance is exempt from creditors, but a revocable trust isn't exempt. If you pass away with debt, creditors can file a claim against the trust and collect from the insurance payout.