Revocable trusts can be worthwhile estate planning options, but protecting your real property against creditors or lawsuits usually isn't one of their advantages. Unlike with an irrevocable trust, you retain control over the assets you place in a revocable trust, and you can take them back into your personal ownership at any time. Revocable trusts aren't forever, so the laws in most states don't treat them as shields against the potential loss of assets.
When you create a revocable trust, you name yourself as trustee so you can continue to manage the trust's assets. Actual ownership of the assets shifts from you to the trust. If anyone sues you and gets a judgment against you – either a creditor or in a liability lawsuit – they can pursue your assets for satisfaction of the judgment. This includes those assets you over which you retain control as the trustee of a revocable trust, as well as those you own individually. If you execute a deed transferring your home into the trust, it's just as vulnerable as if you had continued to own it outright.
The most significant advantage of a revocable trust is that it allows your estate to bypass probate. Your assets can transfer to your named beneficiaries at your death without court involvement or oversight. If you bequeath your house to a beneficiary and if a mortgage exists against the property, your trust documents can detail what you want to do about the lien. You might want your trust to pay off the mortgage so the house passes to your beneficiary free and clear, or you can direct that your beneficiary take the property subject to its mortgage. If your trust documents are silent on this issue, the final decision is left to your successor trustee, the individual you name to take over control of the trust at your death. Either way, by avoiding the probate process, your house is safe from a court-ordered sale to satisfy the mortgage or any other debts.
Because assets in your trust are not part of your probate estate, it's possible that transferring ownership of your house can save it from an elective share claim. This can vary according to state law, however. Elective shares are a statutory percentage – usually about a third – that most states allow a spouse to claim rather than accept the terms of a decedent's will. For example, if you decide you want your spouse to receive nothing at your death, she can typically elect against your will and take about a third of your estate instead. Because your revocable trust bypasses probate, however, some states, such as Michigan, consider its assets immune from elective share law. Elective shares apply to your probate estate. If your house is not included in your probate estate, it may be safe.
Because you retain control over assets placed in your revocable trust, any equity in your house will count toward your estate's total value when determining whether it's large enough to be liable for estate taxes. Placing it in a trust will not save it from estate taxation. Nor will it shield the value of your home from consideration as an asset if you must apply for Medicaid. Medicaid typically does not count your home as an asset when determining your eligibility, but this can vary according to state law. If your state does count the value of your house as an asset, moving it into a revocable trust won't save it from consideration.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.