What Is a Reversible Living Trust?

by Steve Lander

Reversible living trusts are frequently used as estate planning tools. They're a relatively simple -- and easy to set-up -- form of trust. Trusts, in general, are legal entities that get created to hold properties and other assets. When a trust is reversible or, more properly, revocable, it means that you can take your assets back out of it.

Living vs. Testamentary

The alternative to a living trust is a testamentary trust. Testamentary trusts are set up in wills and are used to distribute your assets to your heirs in a controlled fashion. For example, instead of leaving your son $100,000, you may set up a trust that will dole it out either over time or as he hits milestones in his life. It doesn't do anything that a living trust can't do, though. It just saves you the trouble of setting up the trust and putting your property in it while you're alive.

Setting Up a Living Trust

Whether you do it yourself or have an attorney do it for you, setting up a trust has two steps. The first part is to identify the grantor, trustee and beneficiary. The grantor puts the assets into the trust, the trustee controls it, and the trust holds on to the assets for the good of the beneficiary. In many living trusts, you're all three parties. The next step is to transfer your assets to the trust so that it legally owns them.

Living Trust Benefits

The key benefit of a living trust is that, unlike you, it doesn't die. This means that any assets in it won't have to go through probate when you pass away like assets that you own and transfer through a will would. All that you have to do is to designate your heirs as beneficiaries to your trust and designate a trustee to replace you, and your trust will define who gets what and when. Along the way, your trust can protect your family's privacy since its contents are not disclosed, while wills are matters of public record.

Reversible vs. Irreversible

When you set up a reversible trust, it also has some limitations. While it's considered legally separate from you for estate tax purposes, the property in the trust is still really yours since you can take it out at any time. When you set up an irrevocable trust, you set up its rules, designate a third party to run it and put property in it. Once the property is there, though, you don't have any control over it. The trustee you designate makes all of the decisions in accordance with the rules you set up with the trust. Since the property is truly the trust's and no longer yours, you don't just avoid probate with it. It can also avoid estate tax. Putting assets in irrevocable trusts can also provide those assets with protection from your creditors.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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