Estate planning is an essential aspect of securing your financial legacy and ensuring that your assets are distributed according to your wishes after death.

Among the various tools available for estate planning, the revocable Trust is a flexible and efficient method to manage and protect your assets while avoiding the cumbersome probate process.

This guide will explore the details of what a revocable Trust is, how it works, its advantages and disadvantages, and its importance in India.

What Is A Revocable Trust?

A revocable Trust is a legal entity that allows the person who creates the Trust (the Settlor) to transfer assets into the Trust during their lifetime.

One key feature of a revocable Trust is that the Settlor retains control over the Trust and its assets while they are alive. The Settlor can modify, revoke, or terminate the Trust at any time.

Unlike an irrevocable Trust, which cannot be modified by the Settlor once created, the flexibility of a revocable Trust is what makes it appealing to individuals looking for control over their assets and estate planning during their lifetime.

How A Revocable Trust Works

A revocable Trust involves three parties:

1. The Settlor: The individual who creates the Trust and transfers assets into it.
2. The Trustee: The person or entity responsible for managing the Trust assets.
3. The Beneficiaries: The individuals or entities that will benefit from the Trust assets after the Settlor's death.

The Trust document outlines how the assets should be managed and distributed. During the Settlor's lifetime, they have the flexibility to make changes to the Trust, including adding or removing assets or changing Beneficiaries.

Upon the grantor’s death, the successor Trustee takes over the management of the Trust and is responsible for distributing the assets to the named Beneficiaries without having to go through probate court.

Key Features Of A Revocable Trust

1. Flexibility: The Settlor retains control over the assets and can modify or revoke the Trust during their lifetime.
2. Avoids Probate: Since the assets are held in the Trust, they are not subject to the probate process, which can be lengthy and expensive.
3. Privacy: Unlike a Will, which becomes public record during probate, a revocable Trust can help keep your financial affairs private.
4. Estate Planning Tool: Revocable Trusts are often used as a key part of estate planning, especially for individuals with complex estates.
5. Beneficiary Protection: A revocable Trust ensures that Beneficiaries receive the assets according to the Settlor's wishes, without delays from probate.

Revocable Trust vs Irrevocable Trust

While revocable Trusts offer flexibility and control during the grantor’s lifetime, irrevocable Trusts provide asset protection and tax advantages.

Once an irrevocable Trust is established, the grantor cannot modify or revoke it. This means that the Settlor relinquishes control over the assets in the Trust, but it also shields those assets from creditors and reduces estate taxes.

Why Choose A Revocable Trust In India?

In India, where estate planning is often a complicated process involving multiple legal procedures, a revocable Trust offers significant advantages:

1. Avoid Probate: In India, the probate process can be time-consuming, especially when property and assets are distributed among multiple heirs. A revocable Trust bypasses the need for probate, ensuring faster distribution of assets to Beneficiaries.
2. Protect Minor Children: A revocable Trust allows parents to provide for their minor children by specifying how and when the assets should be distributed. This ensures that the children are taken care of in case of the untimely death of the parents.
3. Privacy: Estate planning in India often involves personal and family details that individuals may prefer to keep private. A living Trust allows for asset distribution without disclosing details in public probate court records.
4. Flexibility in Estate Planning: Indian families often deal with complex family businesses and multiple properties, making estate planning even more important. A revocable Trust allows for flexibility in managing those assets and providing for family members according to specific needs.
5. Managing Real Property: In India, property disputes can delay asset transfers. A revocable Trust enables the smooth transfer of immovable property, such as real estate, without court intervention.

How To Create A Revocable Trust In India

Setting up a revocable Trust in India involves several key steps:

1. Draft a Trust Deed: The first step in creating a revocable Trust is drafting the Trust deed, a legal document that outlines the terms of the Trust, the Trustee’s responsibilities, and the Beneficiaries. This document is essential and must be drafted carefully by a qualified legal professional.
2. Transfer Assets into the Trust: Once the Trust deed is complete, the Settlor must transfer the assets into the Trust. These assets can include bank accounts, investments, real estate, and other valuable property.
3. Appoint a Trustee: The Settlor can serve as the initial Trustee and appoint a successor Trustee to take over management upon their death. It is essential to select a trusted individual or professional for this role.
4. Revocable or Irrevocable Trust?: Decide if you want the Trust to remain revocable or if you wish to convert it into an irrevocable Trust at a certain point. Irrevocable Trusts offer more protection from creditors and can reduce estate taxes.
5. Register the Trust: In India, Trusts should be registered with the appropriate authorities if the Trust have to hold immoveable assets.

Tax Implications Of Revocable Trusts

Revocable Trusts are not separate tax entities during the Settlor's lifetime. The income earned by the Trust assets is reported on the Settlor's personal tax return, and the Settlor is responsible for paying any taxes on that income.

Estate Tax & Revocable Trusts

In India, there is no estate tax on inherited assets, as estate taxes were abolished in 1985.

However, capital gains tax may apply when Beneficiaries sell assets that they have inherited.

The capital gains are calculated based on the original purchase price of the asset.

While revocable Trusts do not provide estate tax benefits, they are an effective tool for avoiding probate and ensuring the smooth distribution of assets.

Avoiding Probate With Revocable Trusts

The most significant advantage of a revocable living Trust is that it allows individuals to avoid the probate process.

Probate is the legal process through which a court oversees the distribution of a deceased person’s assets.

In India, probate can be a lengthy and expensive process, often involving significant delays.

By placing assets into a Trust, the Settlor ensures that the Trust assets bypass probate and are distributed directly to the Beneficiaries according to the terms outlined in the Trust deed.

Advantages Of Revocable Trusts

1. Flexibility: A revocable Trust allows you to modify or revoke the Trust at any time during your lifetime, making it a flexible estate planning tool.
2. Avoiding Probate: Assets in a revocable Trust do not go through the probate process, ensuring faster distribution to Beneficiaries.
3. Privacy: Revocable Trusts keep your estate planning private, unlike Wills, which become public records during probate.
4. Continuity of Asset Management: If the Settlor becomes incapacitated, the successor Trustee can take over management of the Trust without the need for court intervention.
5. Protection for Minor Children: You can specify how and when assets are distributed to your children, protecting them financially.

Disadvantages Of Revocable Trusts

1. No Estate Tax Benefits: Since the Settlor retains control over the assets, they are included in the taxable estate upon death. A revocable Trust does not help reduce estate taxes.
2. Cost: Setting up a revocable Trust can be more expensive than drafting a Will, especially when legal fees and Trust administration costs are involved.
3. No Asset Protection: Assets in a revocable Trust are not protected from creditors since the Settlor retains control over them.

Revocable Trust vs Will

Both a Will and a revocable Trust are essential components of an estate plan, but they serve different purposes:

• Will: A Will directs how assets should be distributed after death and appoints Guardians for minor children. However, it must go through probate, which can delay asset distribution.
• Revocable Trust: A Revocable Trust bypasses probate, ensuring faster and private distribution of assets, but it does not allow you to appoint Guardians for minor children.

In many cases, individuals in India use both a Will and a revocable trust to cover all aspects of their estate planning.

The Bottom Line: How Yellow Can Help

A revocable Trust is a versatile and essential estate planning tool, particularly for individuals in India who want to avoid the delays and complications associated with the probate process.

It provides flexibility, privacy, and control over asset distribution while you are alive and after your death.

While revocable Trusts do not offer estate tax benefits or asset protection, they are a valuable addition to any comprehensive estate plan.

Consulting with a qualified estate planning professional can help you decide if a revocable Trust is the right tool for managing your assets and ensuring your legacy.

At Yellow, we can help you with all aspects of estate planning, including creating a Trust. Our team of legal experts has more than 50 years of estate planning experience and can help you with any issues you may encounter, while helping you create your Trust in the right and most efficient manner.