Revocable living trusts — when and why they make sense

This article is for educational purposes only and does not constitute medical, legal, or financial advice. Every family situation is different, and you should consult with appropriate professionals about your specific circumstances.

Your mother created a revocable living trust five years ago. She transferred her house, her investment accounts, and her savings into the trust. She named herself as trustee and named you as successor trustee. Last month she had a stroke. She can no longer manage her finances. You contacted the trustee at the financial institution managing her investment accounts. They authorized you to manage the accounts because you're the successor trustee. No court involvement. No guardianship needed. You were able to handle her finances smoothly because the trust was already in place.

This is what a revocable living trust accomplishes. It takes effect during your lifetime. It provides for management of assets if you become incapacitated. It avoids probate after you die. It's the most common type of trust that people create.

A revocable living trust is not right for everyone. But for many families, especially families with significant assets or concerns about probate, a revocable living trust offers real advantages. Understanding what it is and when it makes sense helps you and your parent decide whether this tool is right for your family.

Understanding the Basics

A revocable living trust is a legal relationship where your parent puts assets into a trust during their lifetime. The trust document describes how those assets should be managed and where they should go after your parent dies. Your parent creates the trust and serves as the initial trustee, meaning your parent manages the assets in the trust. Your parent names a successor trustee, which is the person who will take over managing the assets if your parent becomes incapacitated or dies.

The trust is "revocable," which means your parent can change it or cancel it anytime. If your parent decides they don't like the trust, your parent can revoke it and remove assets from the trust. Your parent maintains control while living.

The trust is "living," which means it takes effect during your parent's lifetime, not after death. Unlike a will, which is a piece of paper that sits in a drawer until you die, a trust is active during your parent's lifetime.

Creating a revocable living trust involves several steps. First, your parent meets with an attorney and creates the trust document. The document specifies how assets in the trust should be managed and where they should go after your parent dies. Your parent names a successor trustee and possibly a successor successor trustee in case the first successor trustee can't serve.

Second, your parent transfers assets into the trust. This is called "funding the trust." If your parent has a house, the deed is changed to put the house in the trust's name. If your parent has a bank account, the account is retitled to be in the trust's name. This is important work that sometimes people skip. If assets aren't transferred into the trust, the trust doesn't manage them.

While your parent is living and capable, your parent serves as the trustee and manages the assets just like they would any other assets. Your parent can add more assets to the trust. Your parent can remove assets from the trust. Your parent maintains control.

If your parent becomes incapacitated, the successor trustee takes over. The successor trustee manages the assets according to the trust's directions. The successor trustee can pay your parent's bills, manage investments, and maintain your parent's property. All of this happens without court involvement. There's no guardianship, no conservatorship, no probate. The successor trustee has authority because the trust document gives it to them.

After your parent dies, the successor trustee distributes the assets according to the trust's directions. If the trust says assets go to your child, they go to your child. If the trust says assets go to multiple children, they're divided accordingly. The distribution happens outside of probate. This saves time and money compared to going through the probate process.

Your Parent's Specific Situation

A revocable living trust makes sense for your parent if your parent has significant assets. If your parent owns real estate, has investment accounts, or has substantial savings, a revocable living trust can manage those assets effectively both during lifetime and after death.

A revocable living trust also makes sense if your parent wants to avoid probate. If your parent is concerned about probate costs and delays, a trust addresses that.

A revocable living trust makes sense if your parent is concerned about privacy. Because a trust avoids probate, your parent's affairs stay private. A will creates a public probate record. A trust doesn't.

A revocable living trust makes sense if your parent wants to provide for management of assets if they become incapacitated. If your parent has a stroke or dementia and can't manage their finances, the successor trustee can step in and manage everything without court involvement.

A revocable living trust makes sense if your parent has complicated family situations. If your parent has a blended family, a trust can specify clearly how assets should be divided. If your parent has a beneficiary who can't manage money, the trust can direct that the trustee manage the beneficiary's inheritance.

A revocable living trust probably doesn't make sense if your parent's assets are modest. If your parent owns very little and has modest savings, the cost of creating and funding a trust might not make sense. The probate costs you'd save might not be worth the cost of creating the trust.

A revocable living trust also isn't right if your parent isn't willing to put in the work of transferring assets into the trust. The trust only works for assets that are in the trust. If your parent creates a trust but doesn't retitle property or change how accounts are registered, the trust doesn't accomplish much. The assets stay in your parent's name, not in the trust's name, and those assets will still go through probate.

Taking Next Steps

If you think a revocable living trust might make sense for your parent, start with a conversation with an estate attorney. The attorney can assess your parent's situation and advise on whether a trust makes sense.

Be prepared to discuss your parent's assets. How much real estate does your parent own? What investments does your parent have? What savings? How much of your parent's wealth is in your parent's name versus already having beneficiary designations? The attorney uses this information to advise on whether a trust would be beneficial.

Discuss your parent's family situation. Does your parent have children who should inherit? A spouse? Are there complicated family dynamics? The attorney can advise on how a trust could address your parent's specific family situation.

If you decide to create a trust, the attorney will prepare the trust document. Your parent reviews it, signs it, and the trust is created. This is usually straightforward.

Then comes the important work: funding the trust. Your parent needs to transfer assets into the trust. For real estate, this means working with a title company or attorney to prepare a deed putting the property in the trust's name. For bank accounts, this means contacting the bank and having the account retitled. For investment accounts, this means contacting the investment firm and having the account registered in the trust's name. This work takes time and attention, but it's important. Assets not in the trust don't benefit from the trust's management structure.

Your parent should also keep money in a personal name, not in the trust, for day-to-day expenses. You don't put everything in the trust. You put significant assets in the trust. You keep enough liquid assets in your personal name to live on.

Once the trust is funded, the trust is active. Your parent manages the assets as trustee. Your parent can make changes to the trust. Your parent can add more assets to the trust. If your parent becomes incapacitated, the successor trustee steps in and manages everything.

Coordinate the trust with other planning. Your parent should still have a power of attorney for assets that won't go into the trust. Your parent should have a healthcare power of attorney. Your parent might want a pour-over will, which is a simple will that directs anything not in the trust at death to be added to the trust.

This is one of those planning tools that requires upfront work but pays dividends later. A revocable living trust costs more to create than a will, but it provides advantages that a will doesn't. For the right family situation, a trust is worth the investment.

How To Help Your Elders is an educational resource. We do not provide medical, legal, or financial advice. The information in this article is general in nature and may not apply to your specific situation. If you are concerned about a loved one's cognitive health or safety, consult with their healthcare provider or contact your local Area Agency on Aging for guidance and support.