A revocable trust (also called a revocable living trust or inter vivos trust) is a trust created during the grantor's lifetime that can be modified, amended, or revoked by the grantor at any time. Because the grantor retains control, assets in a revocable trust remain in the grantor's taxable estate.
Primary purposes (NOT estate tax reduction): - Avoid probate: Assets in a revocable trust pass directly to beneficiaries at death without going through the public probate process — saving time, cost, and privacy. - Incapacity planning: The successor trustee can immediately manage assets if the grantor becomes incapacitated (unlike a will, which only takes effect at death). - Multi-state real estate: Avoid ancillary probate in states where the grantor owns real estate. - Privacy: Unlike a will, a revocable trust does not become public record.
Key limitations: - No estate tax protection: The grantor retains control → assets are 100% in the estate. - No asset protection: Grantor's creditors can reach trust assets (because the grantor can revoke and take the assets back). - Funding required: Must actually transfer assets into the trust; unfunded revocable trusts have no benefit.
Tax treatment during the grantor's life: All trust income is reported on the grantor's personal income tax return (Form 1040). A separate trust tax ID is not needed.
At death: Revocable trust becomes irrevocable; assets pass per the trust terms to beneficiaries.
> Exam tip: Revocable trust ≠ estate tax planning tool. Its main benefits are probate avoidance and incapacity planning. A will with a testamentary trust does NOT avoid probate — the trust doesn't come into existence until after probate.