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Revocable or Irrevocable: Which Living Trust is Right for Me?

By Robert L. Loftin There are many options with estate planning, and people often ask about living trusts as an alternative to a will in order to avoid probate, avoid broad tax and creditor liability, high expense, or family feuding. (We’ll talk about avoiding probate another time.) A living trust (some “high brow lawyers” like to call them inter vivos trusts) is created during your lifetime. You designate a trustee (often yourself, a spouse, partner, or trusted friend) with responsibility and fiduciary duty for managing the assets for your benefit; and upon your death later, for the benefit of your heirs or others (“beneficiaries”.) Because a living trust is designed while you are alive, it allows for the easy transfer of assets to beneficiaries in the manner outlined in the trust document, bypassing the process of probate. There are two types of living trusts: revocable and irrevocable. There is also a testamentary trust option, but we will discuss that in a future article.

Revocable Trusts

A revocable trust can be changed or completely canceled by you during your lifetime. Income earned during your lifetime is distributed to you, and only after your death does the remainder of the trust property transfer to the beneficiaries. It’s important to recognize the benefits and disadvantages for this trust.

Benefits of Revocable Trusts

  • A revocable trust provides flexibility and income to you.

  • You retain control over the trust and can change its provisions at any time.

  • If you have health concerns, the person you choose to be the trustee can manage your assets.

  • If you own real estate in a state other than the state you claim as your residence, and transfer the property to the trust, can can avoid additional probate in another state (that’s called “ancillary probate”)

Disadvantages of Revocable Trusts

  • These trusts have higher upfront and ongoing costs. For example, any real estate to be put into the trust must be retitled to indicate that the trust is the owner. The same is true of any property such as cars and boats. (Some “trust mill” lawyers recommend putting everything you own into a living trust, including your clothes. I don’t recommend going to that extreme.)

  • Annual accountings are typically required, which increases the cost.

  • While the trust can be changed at any time, there are costs associated with this, including potential tax liabilities if assets are removed from the trust.

  • Creditors can still reach the assets in a revocable trust during your lifetime.

Irrevocable Trusts

With an irrevocable trust, you transfer ownership of your assets into the trust, so legally you no longer own them. Once you create an irrevocable trust, you typically cannot change its terms or terminate it without the permission of your named beneficiaries.

Benefits of an Irrevocable Trust

  • If you wish, you can form the trust in a way that relieves you of the tax liability on the income generated by assets in the trust.

  • High-risk professionals, such as doctors, use irrevocable trusts as an asset-protection strategy to protect their assets from creditors and from legal judgments. (Not all states allow this, so you would have to form the trust in a state that does.)

  • Property transferred to an irrevocable trust often can avoid or minimize estate taxes.

  • Irrevocable trusts can be established to take care for a special needs child.

Disadvantages of an Irrevocable Trust

  • While your assets can be well protected, you lose future control over them.

  • Irrevocable trusts are difficult to modify once created.

Summary Understanding the differences and limitations between revocable and irrevocable living trusts are important in planning for your estate. Don’t wait — consult with a legal professional today to discuss the options that work best for you and your family. Need an attorney to help you plan your estate? Contact Wallace Jordan today. View and Print PDF

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