Who owns the property in a Revocable Trust? This question always pops up when it comes to estate planning or property management.
Other names, such as Living Trusts, Inter Vivos Trusts, or Living Trusts can be revocable trusts. Still, the purpose is the same: “ Dealing with matters that cannot be settled in the will or last will and testaments.”
The concept of a revocable trust is crucial, especially if you are planning to buy property or you are a law student and want to get a real estate license. In this guide, we will break down what a revocable trust is, how it works, and who owns the property in it.
Terms To Remember:
Before knowing what revocable trust is must understand these three terms
Parties:
Parties are the persons who are involved in the process of trust, trust involves three parties grantor, trustee, and beneficiary or beneficiaries and their relationship with the properties held in the trust.
Grantor:
A grantor is a person who
- Establish the Revocable Trust
- Define all terms and conditions
- Place Assets in the Trust
There can be more than one grantor in a Trust. Grantors are referred to as descendants after they pass away. The grantor also known as
- Creator
- Founder
- Donor
- Trustor
- Settlor
Trustee:
A trustee is a person or legal entity who manages the grantor’s property. The trustee holds title to the property in the trust on behalf of the beneficiaries.
Trustee can be
- A trusted friend or relative of the grantor
- A bank
- An entrusted person like a lawyer
- A trust company
The trustee must manage the property according to the rules outlined in the trust documents.
A trustee is responsible for several key duties, which include:
- Keep records of transactions of trust assets
- Filing income taxes of the trust assets
- Recording of all expenses and income
- Distributing funds to beneficiaries
Beneficiary:
The beneficiaries are the people who get the advantage from the trust. Multiple trusts do not share the same interest in the trust assets.
When the trust is being drafted it is not necessary for the beneficiaries to present their. It is the grantor’s responsibility to designate almost any person or legal entity as a beneficiary of a trust, will, or life insurance policy.
After understanding the above four terms it’s easy to understand what a Revocable Trust is.
What is a Revocable Trust?
A revocable trust is an association created by a grantor to hold and manage assets such as property for the benefit of individuals or entities (beneficiaries). The word revocable means that the person who creates the trust (grantor) can change, modify, or completely revoke the trust at any time during their lifetime. This is an attractive option for many people.
The basic function of a revocable trust is to ensure that the assets are managed according to the guarantor’s wish and can easily pass to the beneficiaries after the grantor’s death.
Assets Included in a Revocable Trust:
A wide range of assets can be placed into a revocable trust, including:
- Real estate (e.g., your home or investment property)
- Bank accounts
- Investment portfolios
- Vehicles
- Business interests
- Valuable personal items (like jewelry or artwork)
What is an Irrevocable Trust?
An irrevocable trust cannot be changed once it is created. The Grantor loses control after signing the trust assets. The main reason to choose an irrevocable trust is to protect the property from creditors or reduce estate taxes. However, the downside of irrevocable trusts is the lack of flexibility. They can not be modified or changed once they are created.
How Does a Revocable Trust Work?
- Creation: The grantor sets up the trust and transfers ownership of their assets (such as real estate, stocks, or personal items) to the trust.
- Management: During the grantor’s lifetime, they typically act as the trustee, managing the assets in the trust. They still have control over the property as if it were their own.
- Revocation or Modification: The grantor can revoke or amend the trust at any time. For instance, if he wants to remove the beneficiary, he can update the trust.
- Death of the Grantor: Upon the grantor’s death, the trust becomes irrevocable (it cannot be changed), and the assets in the trust are distributed to the beneficiaries according to the grantor’s instructions.
Who Owns the Property in a Revocable Trust?
Even though the property is legally held under the trust’s name, the grantor maintains control. In a revocable trust, the grantor still owns the property because they have the power to revoke or alter the trust at any time.
Sometimes the grantor acts as both the trustee and the beneficiary. This means that the grantor can manage the property, sell it, or even remove it from the trust if they wish. Essentially, the grantor maintains ownership rights while enjoying the benefits of having their property held in trust.
For real estate agents and property buyers, it is a must to understand the essentials of revocable trust. It can affect the buying process, and negotiations, as properties are held in trust. Properties in the trust may have different considerations compared to those owned outright by an individual.
Because of this setup, a revocable trust does not offer the same level of asset protection as an irrevocable trust. Creditors can still make claims against assets in a revocable trust because the grantor technically remains the owner.
Taxes on a Revocable Trust:
Since the grantor retains control of the assets within a revocable trust, they are also responsible for paying taxes on any income generated by those assets. The revocable trust does not have its tax identification number (TIN); instead, it uses the grantor’s Social Security number.
This means:
- Income from the assets (such as rental income from a property) is taxed as personal income.
- The grantor includes this income in their regular tax return.
- No special tax forms are required for the trust during the grantor’s lifetime.
Once the grantor passes away, however, the trust may become irrevocable, and the taxation rules will change.
Can Property in a Revocable Trust Be Sold?
Yes, the property can be sold in a Revocable trust. If the grantor is alive he can sell the property.
- The grantor retains control of the property.
- The sale process is the same as if the property were not in a trust.
- After the sale, the proceeds can stay in the trust or be removed.
Selling property within a revocable trust doesn’t require special legal processes. The grantor signs as the trustee of the trust, which means they have the full authority to act.
Managing Grantor’s Death:
After the grantor’s death, the trust becomes irrevocable. It means it can no longer be altered. At this stage, the trustee is responsible for managing the trust’s assets and distributing them to the designated beneficiaries.
The death of a grantor marks a significant transition for a revocable trust. Upon the grantor’s passing, the trust typically becomes irrevocable, meaning that its terms can no longer be altered. At this point, the successor trustee takes on the responsibility of managing the trust’s assets and distributing them to the designated beneficiaries.
Benefits of Using a Revocable Trust for Property:
Now that we’ve covered the basics, let’s explore why people often choose to place their property in a revocable trust:
- Avoiding Probate: When you pass away, your assets go directly to your beneficiaries without going through probate, saving time and legal fees.
- Privacy: Since a trust isn’t a public record, your assets and who gets them remain private.
- Flexibility: As long as you’re alive, you can make changes to the trust whenever you want.
- Control: You maintain full control of your assets while you’re alive, but they’re managed in an organized manner for your heirs after your death.
Conclusion:
A revocable trust can be an excellent tool for managing property, ensuring smooth transitions for your assets and properties, and keeping your estate out of probate. However, the grantor retains ownership and control of the property while they’re alive, which means they also bear the tax burden. The flexibility of revocable trusts allows the grantor to change their mind, sell property, or modify the trust at any time.
If you want to use a revocable trust for your property, it can simplify asset management, provide peace of mind, and ensure your loved ones are taken care of after you pass. Always consult with a legal expert to determine if it’s the right move for your situation.
