Question: What is the difference between a revocable and irrevocable trust? More importantly, what is right for you?
Answer: A tool often used in estate plans to control the flow of assets is an inter vivos trust, more commonly referred to as a living trust.
An inter vivos trust is a legal document created while the individual for which the trust is drawn up is still living. The assets are titled in the name of the living trust by the trust owner and are used or spent down by the trust owner while he or she is alive. Once the trust owner passes away, the designated beneficiaries of the trust are granted access to the assets, which are then managed by a successor trustee.
Living trusts tend to come in two basic flavors: revocable and irrevocable. Each type of inter vivos trust has a specific purpose.
Revocable living trust
A revocable living trust is a trust document created by an individual which can be changed over time. Designated beneficiaries, assets, distribution of those assets and assigned trustees can be changed at the request of the trust owner at any time after the trust is established or while it is in force. Similarly, if the trust owner decides the trust is no longer appropriate, he or she can revoke it altogether. A change to a revocable living trust is completed through a trust amendment document initiated by the trust owner.
As soon as you die, a properly set up revocable trust will become an irrevocable trust, and the trustee will manage it. Thus, a revocable trust can become a partial substitute for a will.
That process is only worth it for assets which are not jointly owned, such as real estate property, or that have a direct beneficiary, such as an individual retirement account.
A revocable trust is useful for setting up plans to handle your assets and income in the event you become incapacitated. But you might be able to achieve the same planning goals by using a durable power of attorney.
Finally, this type of trust is not appropriate for all estate planning needs. If a trust is titled revocable, all assets used to fund the trust are considered the trust owner’s personal assets. This means that revocable living trust assets are not protected from creditors in the event the trust owner is sued, nor are they sheltered from state or federal estate taxes when the trust owner passes away.
Irrevocable living trust
An irrevocable living trust is a trust document which cannot be changed after it has been signed. Irrevocable trusts, however, are only for the very sure.
Be aware that the principal irrevocable trust advantages, typically tax advantages, mainly exist for the very well off.
Even then, advantages come in the form of complex constructs in irrevocable trusts which are costly to set up and administer, estate lawyers and advisors say.
For the rest of us, the advantages of irrevocable trusts result mainly from the value of addressing special circumstances, such as guaranteeing for the continued support of a disabled dependent or ensuring protection of assets from professional liability.
You might also turn to an irrevocable trust to effectively protect assets from creditors, but only if you are thinking way ahead and put assets in trust before you have credit problems. If you are trying to defend against an emerging legal or credit situation by creating an irrevocable trust, that could be interpreted as a fraudulent conveyance.
In any of those cases, any advantages for the grantor come with the caveat that you essentially, permanently lose control of whatever is in the irrevocable trust.
A Beaver County attorney whose practice involves estate planning advises his clients to consider irrevocable living trusts if they want to transfer real property to their children. But he always insists there be a retained life estate to protect the parents’ homestead rights as well as parents’ rights to claim property tax rent rebate if eligible.
Last word
In sum, it’s called a trust for a reason. You’re counting on this stand-alone legal entity to do something you can’t. You may want the trust to ensure that ownership of your assets or property will transfer to heirs smoothly or privately. You may want to convey some tax advantages. You may think it can protect your assets from creditors.
The first thing to consider is not whether to set up an irrevocable or revocable trust, but how much control you want and need over your property or assets, or both. That will dictate if you should have an irrevocable or revocable trust.
Remember, creating either a revocable or irrevocable trust is not a substitute for a will.
To ask a legal question, email AskAttyBernie@timesonline.com or send mail to Ask Attorney Bernie, c/o Beaver County Times, 400 Fair Ave., Beaver, PA 15009.