Before explaining what a revocable living trust is, it is important to define some trust terms:
Settlor (aka trustor or grantor) – The creator of the trust.
Beneficiary – Someone named in the trust to inherit trust property.
Trustee – Manages the trust and ensures that the provisions of the trust are fulfilled. The settlor is usually the trustee in a revocable living trust and the settlor names successor trustees.
A revocable living trust is a legal document that enables a settlor to appoint beneficiaries who will inherit property of the settlor when the settlor passes away. In a revocable living trust, the settlor has control over the assets in the trust during the settlor’s life. Once the settlor passes away, the trust becomes irrevocable and assets in the trust pass to the settlor’s beneficiaries named in the trust without the need for probate. The trust is considered revocable because the trust can be changed or revoked at any time by the settlor during the settlor’s life.
For assets to be added to a trust, the assets (assets, bank accounts, real property etc.) must be transferred to the trust. For example, if you want your real property added to your trust, you must transfer your real property to the trust by deed. The process of transferring assets to a trust is called “funding” the trust. Assets that are not transferred to the trust may be subject to probate.
Assets in a revocable living trust are considered owned by the settlor. Thus, taxes on income from assets in the trust are reported on the settlor’s personal tax return and assets in the trust are not protected from creditors. A revocable living trust should be viewed as an estate planning tool to avoid probate, and not much else.