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Busted: The 2 Biggest Myths About Revocable Trusts

Myths about revocable trusts busted

A revocable trust is a form of estate plan that avoids the probate process. This is typically recommended for those with families, so that they can put all their assets in their family trust and get distributed to the beneficiaries they named, typically their spouse and children. To be distributed, there is no need for a judge to oversee the process. This type of estate plan doesn’t need to go through the lengthy probate process, which is why it’s attractive to people with families.

However, many people come to different conclusions when it comes to revocable trust. Here are the biggest myths regarding this estate plan — now busted. 

Myth #1: Revocable Trusts protect a debtor from creditors or medical claims. 

In a revocable trust, an individual can put all their assets in during their lifetime, such as their house, business, checking account, etc. The trust can take it out anytime, having full control over the revocable trust. However, there is no additional layer of protection against creditors or medical claims in this type of estate plan. 

If the individual files for bankruptcy, the assets in that trust are considered part of the estate and can be accessed by the bankruptcy trustee to settle their debts. In the same manner, the trust assets will also be accessible if the individual gets sued or divorced.

The only main difference and benefit of a revocable trust is that it allows the trust assets to skip the lengthy probate process. This is compared to a will where a probate is required to oversee the distribution. In a revocable trust, the assets are almost immediately transferred to the beneficiaries upon the death of the trust holder.

Myth #2: Revocable Trusts protect an individual from taxes.

Another common misconception is that a trust protects the assets from taxes. This is not true. Any income that goes to the trust is subject to taxes. Once those assets are taken out of the trust, the taxes will have to be paid.

In fact, revocable trusts have their own tax ID number. Some institutions will ask for that tax number, such as when you open a bank account. 

A revocable trust has a lot of benefits for family members, the main one being that they can avoid the probate process upon the death of the holder. This is the reason why this form of estate plan is so popular. But its benefits do not exempt the assets from taxes nor do they hide the assets from any claims brought about by creditors. 

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