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Thinking about setting up a revocable trust?
It can be a powerful estate planning tool, but it’s not perfect. While it gives you flexibility, control, and helps avoid probate, there are some hidden drawbacks you should know before moving forward.
One key downside?
It doesn’t protect your assets from creditors or lower your estate taxes. So if you’re looking for bulletproof protection or major tax breaks, this might not be the solution.
At BetterWealth, we help individuals design estate plans that reflect their unique goals, not just popular strategies. We’ll help you understand the real-life impact of tools like revocable trusts, so you don’t get stuck with a plan that sounds good on paper but doesn’t actually serve your needs.
In this blog, we’ll break down:
Let’s start by understanding what a revocable trust does, and what it doesn’t.
Revocable trusts let you keep control of your assets while laying out how they are managed and passed on. They offer flexibility but also have limits you should know. You’ll learn what a revocable trust is, how it works, and the common types used in estate planning.
A revocable trust is a legal document that holds your assets during your lifetime.
You can change or cancel it at any time while you’re alive. The main goal is to manage your property and avoid probate, which is the court process to settle an estate. Because you control the trust, you can update it as your needs change.
They help with privacy since trust details don’t become public like a will. However, this control means the trust offers little protection against creditors or lawsuits.
When you create a revocable trust, you transfer ownership of your assets—like money, real estate, or investments—into the trust’s name. You usually serve as the trustee, managing the assets.
You set rules for how assets are handled or distributed, usually to beneficiaries you choose. During your lifetime, you can use the assets freely. The trust is “revocable” because you can alter or cancel the terms. After you die, the trust typically becomes irrevocable.
Then, a successor trustee handles the assets according to your instructions, often avoiding probate delays and costs. Tax-wise, assets in a revocable trust are still treated as yours.
Income and taxes are reported under your Social Security number until your death.
There are several kinds of revocable trusts depending on your goals:
Choosing the right type depends on your financial and family situation. Each offers control but varies in how and when it functions.
A revocable trust offers control and ease over your assets but has significant limitations. These include weak protection against creditors, no help with estate taxes, ongoing management duties, and possible legal complications.
When you create a revocable trust, you keep control over your assets during your lifetime. However, creditors can still access those assets to satisfy debts or legal claims.
Unlike irrevocable trusts, which remove assets from your control, revocable trusts do not offer real protection against lawsuits or creditor claims. If protecting your assets from creditors is a priority, you must look beyond a revocable trust.
Any debt you owe or legal judgments against you affect assets held in the trust the same way they affect your personal property. This limitation means you can't use a revocable trust to shield your estate from financial risks.
One common misunderstanding is that a revocable trust reduces estate taxes. It does not.
The IRS still counts the assets in your revocable trust as part of your taxable estate. This means the value of the trust is taxed just like any other asset you own when you die.
If your goal is to lower estate taxes, consider other tools, such as irrevocable trusts, which can remove assets from your taxable estate. The revocable trust only helps with probate avoidance and managing how assets are distributed, not reducing tax bills.
Setting up a revocable trust is not a one-time task.
You must actively manage it by retitling assets into the trust’s name. This includes bank accounts, real estate, and investments. Failing to do this properly limits the trust’s effectiveness, especially in avoiding probate.
You also need to review and update the trust as your life changes. Changes in family, assets, or laws may require adjustments.
You or your advisor must maintain the trust regularly, which adds time and sometimes costs.
Although a revocable trust can simplify some aspects of estate planning, its legal setup is still complex. Trust documents must be carefully drafted to match your intentions and comply with state laws.
Mistakes in drafting or funding the trust can cause unintended consequences. For example, assets not properly transferred might still go through probate.
Also, trust administration after death can be complicated if instructions are unclear. You should work with an experienced estate attorney to avoid these pitfalls and ensure the trust works as planned.
Using a revocable trust does offer some privacy benefits, but these protections have limits during your lifetime. Certain information may still be exposed in public records, and your ability to protect your privacy can weaken if you become incapacitated.
Unlike a will, a revocable trust generally avoids probate, which helps keep your estate details out of the public probate record. However, the trust itself is not entirely private.
Because you retain control and can change or revoke the trust at any time, the assets inside it are still considered yours. If you face lawsuits or creditor claims, those records could reveal the trust’s contents.
Your privacy is also limited while alive because you must manage and report some trust activities in personal tax filings. That makes your financial information visible to authorities or others involved in legal processes.
If you become incapacitated, the revocable trust becomes a tool to handle your finances without court intervention. But this shift can affect privacy.
The person you name as successor trustee will manage your trust and may need to share detailed financial information with medical professionals, advisors, or courts overseeing your care.
While this helps avoid some public court hearings, it increases the number of people who can access your private financial details. This can create privacy risks if those people are not bound by strict confidentiality.
Setting up and keeping a revocable trust involves various fees. These costs can be higher than preparing a simple will and may add up over time.
Creating a revocable trust often costs between $1,500 and $4,000, depending on how complex your estate is. If your assets or wishes are complicated, this fee can increase.
You may also pay for transferring property titles or deeds into the trust, which can add about $800 to $1,000 per deed due to county filing fees. These setup costs are usually much higher than preparing a will, since trusts require detailed legal work.
If you live in certain states like California, fees can sometimes reach $5,000 to $10,000 or more. Planning for this can help you choose the right strategy for your estate.
Once your revocable trust is established, you’ll face ongoing costs. These include trustee fees, legal advice for updates, and tax preparation fees.
As your assets or situation change, updating the trust may require additional legal work, which can increase expenses over time. Unlike a will, a trust may involve more paperwork and professional help every few years. This ongoing maintenance is essential to keeping your estate plan current and enforceable, but depending on its complexity, it could cost several hundred to a few thousand dollars annually.
Budgeting for these fees ensures your plan stays effective without unexpected financial strain.
After you pass, your control over your trust changes. You can no longer make decisions or adjust terms yourself. How assets are managed and passed on depends on the trust’s rules and the trustee you appointed.
Once you die, you lose the power to revoke or change the trust.
You cannot add or remove beneficiaries, or alter how assets are distributed. The trust becomes permanent, and the terms you set during your life are binding. Your control ends entirely, so it’s essential to plan carefully.
Any changes must be made while you are alive. After death, the trustee follows only your instructions in the trust document.
Distributing assets can become complex after your death.
Even though a revocable trust avoids probate, beneficiaries may still face delays or confusion if the trust terms are unclear or include conditions.
If you restrict when or how beneficiaries receive assets, the trustee must enforce these rules strictly. This can slow the transfer process or limit beneficiaries’ access to funds, which might cause frustration or hardship.
Many people believe revocable trusts solve all estate planning problems, but that is not true. Some assume these trusts avoid taxes and protect assets fully, while others think they help with Medicaid planning. Understanding what a revocable trust can and cannot do is key to using it effectively.
You might think a revocable trust completely avoids probate, but that’s only partly true.
While assets in the trust usually skip probate, any assets outside the trust still go through the process. If you forget to transfer property into the trust, those assets will face probate. Also, a revocable trust does not prevent court involvement if legal disputes arise about the trust’s terms.
Key points:
It’s a common mistake to believe a revocable trust protects your assets from Medicaid claims. Because you control and can change or cancel the trust anytime, the assets still count as yours for Medicaid eligibility.
This means those assets could be used to pay for long-term care expenses. If you want Medicaid protection, you’ll need an irrevocable trust or other planning tools, as revocable trusts don’t shield your assets from Medicaid.
Important to know:
A revocable trust might not be the best choice if you need strong asset protection. Because you can change or cancel the trust anytime, its assets are not shielded from creditors or lawsuits.
If protecting your wealth from legal claims is a priority, consider other tools. You should also avoid placing certain assets in a revocable trust. Examples include Social Security benefits, retirement accounts (like IRAs and 401(k)s), life insurance policies, and health savings accounts.
These types of property often have rules that make them incompatible with trusts or can cause tax issues. If you want to reduce your taxes during your lifetime, a revocable trust won’t help. You still pay income taxes on any earnings as if you owned the assets directly. The trust only files a separate tax return after your death.
If you prefer simplicity, remember that a revocable trust requires effort to fund and maintain. You must transfer titles and update accounts actively, which can be time-consuming and sometimes costly.
Situations to Avoid Using a Revocable Trust
Reason
Needing asset protection
Trust assets not protected
Holding retirement accounts
Tax and legal restrictions
Seeking tax savings during life
No income tax benefits
Wanting a low-maintenance plan
Requires effort to manage assets
You might still have some specific concerns even with a clear understanding of how revocable trusts work. Here are a few frequently asked questions that go beyond the main points already discussed in this blog:
Yes, during your lifetime, you can be both the trustee and the beneficiary. This lets you manage and benefit from your assets, but it also means the assets remain part of your estate and are not protected from taxes or creditors.
A will only takes effect after your death and typically goes through probate. A revocable trust helps you manage assets while you're alive and can streamline distribution after death. Many people use both for a more complete estate plan.
Your debts don’t disappear. Creditors can still claim what’s owed from the trust assets before anything is distributed to beneficiaries. The trust doesn’t protect your estate from paying off outstanding debts.
Yes, you can transfer ownership of a business into a revocable trust, but it depends on the type of business entity. Sole proprietorships are easier to transfer, while LLCs or corporations may require more steps and formal documentation.
Only if your spouse is named as the successor trustee, if you want them to manage or access the trust after your death, you must clearly state that in the trust documents.
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