Revocable vs. Irrevocable Trusts
Those who decide to establish a trust will need to consider the pros and cons of revocable versus irrevocable trusts.
Kevin Horner
Galligan & Manning
A living trust can be revocable or irrevocable, says Yahoo Finance’s recent article entitled “Revocable vs. Irrevocable Trusts: Which Is Better?” It is certainly true that not everyone needs a trust, and there are many different types of trusts you can establish. But, when considering a trust, clients need to consider the pros and cons of revocable versus irrevocable trusts.
Revocable Trust
A revocable trust is a trust that can be changed or terminated at any time during the lifetime of the trustor (i.e., the person making the trust). This means you could:
Add or remove beneficiaries at any time
Transfer new assets into the trust or remove ones that are in it
Change the terms of the trust concerning how assets should be managed or distributed to beneficiaries; and
Terminate or end the trust completely.
When you die, a revocable trust automatically becomes irrevocable and no further changes can be made to its terms.
The big advantage of choosing a revocable trust is flexibility. A revocable trust allows you to make changes and to grow with your needs. Revocable trusts can also allow your beneficiaries to avoid probate when you die. Most clients use revocable trusts during their lifetimes, although they might establish irrevocable trusts for other people or to address specific circumstances.
However, a revocable trust doesn’t offer the same type of protection against creditors as an irrevocable trust. If you’re sued, creditors could still try to attach trust assets to satisfy a judgment. The assets in a revocable trust are part of your taxable estate and subject to federal estate taxes when you die, which is usually a good thing, but in some assets isn’t sufficient tax planning. It also provides no advance asset protection for Medicaid.
Irrevocable Trust
An irrevocable trust is permanent. If you create an irrevocable trust during your lifetime, any assets you transfer to the trust stay in the trust. You can’t add or remove beneficiaries or change the terms of the trust.
Irrevocable trusts are commonly used for creditor protection or tax planning. There are times, such as when considering long-term care Medicaid in a nursing home, or reducing the size of your estate for estate tax purposes, that you want the asset not in your name and out of your personal control. The irrevocable trust can achieve that by having the trustee own it instead of you.
Irrevocable trusts created during your lifetime are often done in addition to a revocable trust so that you achieve the particular benefits of an irrevocable trust only for that property which needs the advantage.
Irrevocable trusts are more commonly something you set up to be effective at your death. We’ve written extensively on this, but it is extremely common to leave your children’s inheritance to them in irrevocable trusts that set the rules by which they benefit from the trust and provide creditor and divorce protection to the beneficiary. This also works with spendthrift beneficiaries and similar trusts are used when a beneficiary has a disability and is using government benefits.
It is worth noting that irrevocable trusts, despite their name, sometimes can be revoked, changed or you can remove property from them.
For example, irrevocable trusts might have a power of substitution allowing you to take out property as long as you put equal value property back in. Irrevocable trusts can sometimes be revoked or changed by the agreement of all parties (including beneficiaries) although that doesn’t work if minors are involved. Irrevocable trusts that are broken and no longer serve their original purpose can also sometimes be fixed by a process called decanting. It involves creating a new trust and “decanting” the assets of the first into the second.
If you are using irrevocable trusts you are working with very sophisticated tax and creditor laws, so you’d have to check with your attorney if those options will fit with the trust you are creating. It is also not something we like to rely on, which is one of the reasons irrevocable trusts are used less.
Speak with an experienced estate planning or probate attorney to see if a revocable or an irrevocable trust is best for you and your goals.
Reference: Yahoo Finance (Sep. 10, 2022) “Revocable vs. Irrevocable Trusts: Which Is Better?”