# Revocable Trust Definition and How It Works

> **Definition**
>
> A revocable trust is a flexible estate planning tool that allows the grantor to alter or cancel its provisions during their lifetime while bypassing probate in the event of the grantor's death.

## What Is a Revocable Trust?

A revocable [trust](https://www.investopedia.com/terms/t/trust.asp) is a living trust with terms that can be changed or even undone entirely by its [grantor](https://www.investopedia.com/terms/g/grantor.asp), the individual who created it and funded it with assets to pass on to beneficiaries. Income earned by the assets is distributed to the grantor until their time of death. The property held in the trust doesn't transfer to the [beneficiaries of the trust](https://www.investopedia.com/terms/b/beneficiary-of-trust.asp) until after the grantor's death.

A revocable trust can be a helpful estate planning tool because it provides flexibility and income to the living grantor, also called the [trustor](https://www.investopedia.com/terms/t/trustor.asp).

### Key Takeaways

*   Trusts are created by individuals who assign a trustee to manage and distribute the assets to the beneficiaries after the owner's death.
*   Revocable trusts let the living grantor change instructions, remove assets, or terminate the trust.
*   Irrevocable trusts can't be changed. Assets placed inside them can't be removed by anyone, not even the grantor, for any reason
*   Revocable trusts allow beneficiaries to avoid probate court.
*   These trusts have upfront costs, involve many steps to fund, and don't necessarily exempt the owner from needing a will.

![Revocable Trust: A trust whose provisions can be altered or canceled by the grantor.](https://www.investopedia.com/thmb/gSHAnQg-vXGONmf2-QmPeiYKRok=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/revocabletrust.asp-final-7bd373e28dc342bd886a97f39d3e0b3d.png)

*— Investopedia / Julie Bang*

## How a Revocable Trust Works

A [revocable trust](https://www.investopedia.com/articles/financial-advisors/012916/revocable-trusts-101-how-they-work.asp) is an [estate-planning](https://www.investopedia.com/terms/e/estateplanning.asp) option that manages the assets of the grantor as they age. It can be amended or revoked if the grantor desires. The property it holds is included in the grantor's estate for [estate tax](https://www.investopedia.com/terms/e/estatetax.asp) purposes.

A [trustee](https://www.investopedia.com/terms/t/trustee.asp) might be assigned to manage the assets or property within the trust or the grantor can act as trustee during their lifetime, naming a successor trustee to take over and disburse the trust after their death. This is quite unlike an irrevocable trust. The successor trustee is charged with distributing the assets to the beneficiaries. The trust [becomes irrevocable](https://www.investopedia.com/ask/answers/071615/what-difference-between-revocable-trust-and-living-trust.asp) upon the grantor’s death.

The money or property held by the trustee for the benefit of someone else is referred to as the trust's principal. The value of the principal can change due to the trustee’s expenses or an investment’s appreciation or depreciation in the financial markets. The collective assets make up the [trust fund](https://www.investopedia.com/terms/t/trust-fund.asp). Those benefiting from the trust are the beneficiaries. A revocable trust holds the assets and it doesn't die so the trust avoids [probate](https://www.investopedia.com/terms/p/probate.asp), the legal process of distributing assets of a [will](https://www.investopedia.com/terms/w/will.asp).

> **Important**
>
> All trusts are either revocable and can be changed by the grantor or they're irrevocable, fixed trusts that can't be changed after they're established.

## Advantages and Disadvantages of a Revocable Trust

There are several advantages of establishing a revocable trust. It can allow the grantor’s chosen successor to step in and take control of the principal if the grantor experiences health concerns through the aging process.

Ancillary probate of real estate that the trust holds is avoided if the grantor owns [real estate](https://www.investopedia.com/terms/r/realestate.asp) outside the state of the grantor's [domicile](https://www.investopedia.com/terms/d/domicile.asp) and the real estate is included in the trust.

A minor beneficiary’s assets can be held in the trust rather than having the court appoint a guardian if the beneficiary isn't of legal age and can't yet hold property. The trust allows a set amount of money to be distributed regularly and incrementally if the grantor believes a beneficiary won't use the assets wisely.

Administration of these trusts is quite easy. They're disregarded entities for income tax purposes. Taxes deriving from any assets held in the trust are assigned to their grantors during their lifetimes.

There are some disadvantages to revocable trusts, too, however. Implementing a revocable trust involves much time and effort. Assets must be retitled in the name of the trust to avoid probate. The grantor’s entire estate plan must be [monitored annually](https://www.investopedia.com/articles/personal-finance/070815/10-questions-ask-your-estate-planning-attorney.asp) to ensure that the trust’s objectives are being met.

The costs of maintaining a revocable trust are greater than other estate planning tools. A revocable trust doesn't offer the grantor any estate tax advantages. It's possible that not all of a grantor's assets will be included in their revocable trust so the grantor would have to also create a will to designate beneficiaries for the remaining assets and these would have to pass through the probate process. Creditors can still reach the property in a revocable trust during the grantor's lifetime.

### Revocable Trust Pros and Cons

Pros

*   Flexible and revocable
    
*   Can avoid probate
    
*   Protection if trustor becomes incapacitated
    
*   Establishes privacy for assets
    

Cons

*   No immediate tax advantages
    
*   No creditor protection
    
*   Can be expensive to establish and administer
    

## What Is a Revocable Living Trust?

A [living trust](https://www.investopedia.com/terms/l/living-trust.asp) is one that's established during an individual's lifetime. It can be either revocable or irrevocable. A revocable living trust is often used in estate planning to avoid probate court and fights over the assets of an estate. A revocable living trust doesn't confer tax or creditor protection, unlike an irrevocable trust.

## Which Is Better: A Revocable Trust or an Irrevocable Trust?

Revocable and Irrevocable trusts are used for different purposes. A revocable trust can be undone and dissolved by the grantor if it no longer serves the grantor's needs. An irrevocable trust can't be changed or altered once it's established. The trust becomes a legal entity that owns the assets it holds.

The trustor no longer controls or owns these assets so there are certain tax advantages and creditor protections. Irrevocable trusts are best used for transferring high-value assets that could cause gift or estate tax issues in the future.  

## What Happens to a Revocable Trust When the Grantor Dies?

A revocable trust automatically converts into an irrevocable trust when the grantor dies.

## Can You Get Deposit Insurance on a Trust Account?

Yes, you can. As of April 1, 2024, the [Federal Deposit Insurance Corporation (FDIC)](https://www.investopedia.com/terms/f/fdic.asp) issued final regulations that alter how bank accounts held in the name of a trust will be insured as of April 1, 2024.

The regulations effectively treat revocable and irrevocable trusts the same in terms of determining the insurance limits, combining them into a single category called "trust accounts." Funds in a bank for a trust are insured up to $250,000 per beneficiary per FDIC-insured bank up to a maximum of five eligible beneficiaries, or $1.25 million. An eligible beneficiary can be any living person or a charity or nonprofit recognized by the IRS.

A trust owner with three eligible primary (not contingent) beneficiaries is insured up to $750,000.

## The Bottom Line

A revocable trust is created during your lifetime and can help you manage your assets as well as protect you if you become ill or disabled. Its advantage over an irrevocable trust is that you can revoke or amend it whenever you like provided that you're of sound mind. A revocable trust will also help your heirs avoid probate but it won't avoid estate tax.  

> **Article Sources**
>
> 1.  Consumer Financial Protection Bureau. "[What Is a Revocable Living Trust?](https://www.consumerfinance.gov/ask-cfpb/what-is-a-revocable-living-trust-en-1775/)"
>     
> 2.  Federal Deposit Insurance Corporation. "[New Trust Account Rule (April 2024) Deposit Insurance Seminar for Bankers](https://www.fdic.gov/resources/deposit-insurance/banker-webinar/documents/fdic-new-trust-account-rule-seminar-banker-slides-2022.pdf)." Pages 6-8.