The revocable living trust is the most common type of trust. In a revocable living trust you assume the role of all three key participants – Grantor, Trustee and Beneficiary. You are the creator of the trust, you are the acting trustee managing the assets in the trust, and you are the one who receives all the benefits from the assets held in trust. You wear all three hats – you made the trust, you manage the assets held in the trust for your own benefit.
Technically, from an income tax perspective, a trust where Grantor is also the Trustee and Beneficiary is known as a Grantor Trust. From an income tax standpoint Grantor Trusts are not considered a separate taxable entity. They are not required to obtain a separate tax ID number. All income of a Grantor Trust trust is reported on the Grantor’s individual tax return.
As the name implies this type of trust revocable. It can be changed, modified or revoked in its entirety at any time by the Grantor (the individual who made the trust). The trust is referred to as “living” because it holds the Grantor assets while the Grantor is alive.
Because you have complete and total control of the trust and all assets held in the trust a revocable living trust provides no protection from claims of legitimate creditors. Because all the income of a revocable living trust is reported on the your personal tax return, a revocable living trust provides no income tax advantages.
The primary reason individuals create a revocable living trust is to avoid probate. Upon your death your last will and testament is presented to the Probate Court, the probate process ensures that the terms and conditions of your will are actually carried out. Assets held in your revocable living trust are not considered part of your probate estate, as a result assets held in your revocable living trust can be distributed to your heirs without the time and costs associated with a formal, court administered probate.
The revocable living trust forms the core of nearly every estate plan.