What is a revocable living trust?
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A revocable living trust is an arrangement set up through a legal document. The document gives someone the power to make decisions about another person’s money or property that’s held in the trust.
What is the purpose of a revocable living trust?
People use trusts to keep control of their money and property and to designate who receives money and property once they die. One reason to set up a revocable living trust is to avoid the probate process after death. Probate is a public process, and it can be expensive and lengthy. At the same time, the trust allows a person to continue using the assets transferred to the trust (for example, living in a house or spending money from investments).
A trust can also be set up give someone else the power to make financial decisions on the person’s behalf in the event they become unable to make their own decisions, for example because of injury or illness.
There are three roles under a revocable living trust:
- The person who makes the trust. They might be called the settlor, grantor, or trustor.
- The person who makes decisions about the money or property in the revocable living trust. They are called the trustee. In general, during the life of the grantor, the grantor is their own trustee. A trustee can be an individual or a financial institution. If there is more than one, they are co-trustees. A successor trustee can also be named but can act only if a trustee can no longer fulfill their role, for example, in the event they die or are disabled. A trustee is a fiduciary.
- The people who receive money or property from the revocable living trust. They are called beneficiaries. The person who makes the revocable living trust could be the only beneficiary while they are alive, or they could name co-beneficiaries (for example, themselves and their spouse) who receive some money or property from the revocable living trust before they die. The people who receive money or benefits from the revocable living trust after the person dies are called residuary beneficiaries.
A living trust is ineffective until the person who makes the trust puts their money or property into it. Then, the trustee has authority over the money or property after it’s transferred to the revocable living trust. A grantor typically names themself the trustee in a revocable living trust (though it can be another person). Then, a successor trustee takes over for the grantor as trustee after the grantor has lost the capacity to manage their property.
When you’re acting as trustee or successor trustee, you have the legal authority to spend and invest the money and property in the revocable living trust for the benefit of the named beneficiaries. You don’t, however, have legal authority over any money or property that’s not in the trust.
For more information on trusts, read our guide for trustees on managing someone else’s money .