4 Common Misconceptions About Revocable Trusts

Revocable trusts are a valuable estate planning tool that offers flexibility, privacy, and control over how assets are managed during life and distributed after death. Despite their popularity, many people misunderstand what revocable trusts can and cannot do. These misconceptions can lead to missed opportunities or even costly mistakes in estate planning. Below are four common misconceptions about revocable trusts and the facts behind them.

1. "A revocable trust avoids all taxes."
One of the most common myths is that revocable trusts provide tax advantages similar to irrevocable trusts. Revocable trusts offer little to no tax benefit during the grantor’s lifetime. Because the trust is revocable, the IRS considers the assets to still belong to the grantor. This means that all income the trust earns is reported on the grantor's tax return, and the assets remain subject to estate tax upon death. While certain strategies within a trust may have tax implications, the primary purpose of a revocable trust is not tax avoidance. It is about control, flexibility, and avoiding probate.

2. "Revocable trusts are only for the wealthy."
Another common misunderstanding is that only individuals with large estates must consider revocable trusts. In truth, people at many income levels can benefit from having a revocable trust, especially those who want to avoid probate, maintain privacy, or provide clear instructions in case of incapacity. For example, a modest estate that includes real property in more than one state would typically go through multiple probate proceedings unless the assets are held in a trust. A revocable trust allows for the smooth management and distribution of those assets, regardless of their value.

3. "Once I create a revocable trust, everything is protected."
Some individuals assume that simply signing a trust document shields all their assets from probate and creditors. However, assets must be properly transferred or funded into the trust for it to be effective. If you create a trust but leave your bank accounts, real estate, or investment accounts in your name, those assets may still need to go through probate. In addition, because the trust is revocable, the assets are generally not protected from your creditors during your lifetime. Full protection may require additional planning, possibly involving irrevocable trusts or other asset protection strategies.

4. "A will does the same thing as a trust."
While both a will and a revocable trust can direct how your assets are distributed after death, they function in very different ways. A will must go through probate, which is a court-supervised process that can be time-consuming, expensive, and public. A revocable trust, on the other hand, allows assets to be distributed privately and often more efficiently without the need for court involvement. In addition, a trust can be effective during your lifetime, allowing a successor trustee to step in and manage your affairs if you become unable to do so yourself. A will only takes effect after death and provides no protection in the event of incapacity.

Understanding the real benefits and limitations of a revocable trust is essential for good estate planning. These trusts can be powerful tools when used correctly, but only if you have accurate information and a clear understanding of your goals. If you are considering a revocable trust or want to make sure your current plan reflects your wishes, it is best to speak with an attorney who can guide you through the process and help you avoid these common mistakes.