Revocable vs. Irrevocable Trusts

Revocable vs. Irrevocable Living Trust

Revocable vs. Irrevocable Living Trust

When it comes to understanding trusts, clearly knowing the differences between the different types is crucial.  The most common question I receive is whether a revocable or irrevocable trust will offer the type of security, privacy, and sound estate planning sought.  Well, the main difference is simply that  revocable trust can be changed at anytime up until the death of the grantor(s) and an irrevocable trust cannot be changed at all once executed.

A Revocable Living Trust, also known as a Revocable Trust, Living Trust or Inter Vivos Trust, is simply a type of trust that can be changed at any time.  Please don’t confuse changing a trust with adding/removing assets.  These are two different functions.  What I mean by “changing” a trust is that the Grantor(s) can change who the trustees are, they can change the rules, language, beneficiary designations, distribution strategies, powers of the trustees, and so much more at anytime.  There is no need to file with a Court or the State to make changes.  It is a very easy process and amending a trust is a common thing to do along with trust maintenance. 

An Irrevocable Trust is the opposite in that once it is executed, the trust cannot be changed.  However, some irrevocable trusts are written with instructions to the Trustees or beneficiaries to allow for the terms of the trust agreement to be modified under specific and limited circumstances. For example, Charitable Trusts usually contain provisions to allow modification of the trust agreement to comply with changes in federal tax or other laws. This can be accomplished using a document signed by the Trustee and all of the beneficiaries (usually current as well as remainder beneficiaries must sign), or by a court proceeding seeking judicial modification of the trust. In addition, if circumstances have changed that make the administration of an irrevocable trust expensive or out of date, then the Trustee and/or the trust beneficiaries can request that the terms of the trust be modified or that the trust be completely terminated through mutual agreement or a judicial modification.

There are drawbacks to the Revocable Trust.  Assets funded into the Revocable Trust will still be considered your own personal assets for creditor and estate tax purposes.  Please note that as of 2014, the federal estate taxes only begin on assets over $5.25 million.  So, the estate tax rate only applies to any amounts over 5.25 million dollars.  Thus, most people will find that they will not have to pay any federal estate taxes. 

The downside to irrevocable trusts is that when property is sold or other disposition of all of the property owned by an irrevocable trust can cause the trust to be terminated.  For example, an ILIT that owns a life insurance policy fails to pay the premiums then the policy will either immediately or eventually lapse and the irrevocable trust will be empty.

If you are thinking about a trust, there are many benefits though there are cons to the various types of trusts.  One thing is certain and that is a trust is a superior estate planning document to a will.  I can draft a trust to meet your needs and your goals.