Wills and living trusts are the cornerstones of estate plans. The more assets you have, the more likely you are to need a living trust. There are two types of living trusts: revocable and irrevocable trusts.
If you are newer to the idea of estate planning, we recommend reading What is a Living Trust to learn more. In a snapshot: living trusts are wise options for almost anyone with assets of at least $166,250 that will be distributed to heirs and beneficiaries upon their death. Trusts are created during an individual’s lifetime where a designated person, the trustee, is given responsibility for managing that individual’s assets for the benefit of the eventual beneficiary. They’re designed to allow for the easy transfer of assets while bypassing the often complex and expensive legal process of probate.
4 Differences Between Revocable and Irrevocable Trusts
There are four major differences between revocable and irrevocable trusts.
The ability to modify revocable and irrevocable trusts
A trust is not considered “legal” until the owners officially sign them, at which point the trust is considered “executed.” It can be edited, modified, and added to indefinitely during the creation process, but it is an official legal document once it is executed. This process requires the facilitation of an estate attorney. The documents must be signed by the owners with a witness (typically the estate attorney) and then notarized.
When a trust is revocable, specific language is included stating the owner(s) can make changes at any time. This is not uncommon, especially if the owners live a good long time, during which marriages, divorces, deaths, and income/investment status changes may change how and two assets are distributed. These changes are made with the attorney and re-signed, witnessed, and notarized. This is one of the reasons we recommend revisiting and updating will and trust documents on an annual basis.
However, irrevocable trusts are a different story. After they are formally executed, trusts can no longer be modified. Period. The trust lives as is, and there is no going back, making amendments, or changing it, including its funding.
When a trust is irrevocable, any property, assets, funds, etc., included in the trust become the property of the trust. Once assets are transferred into the trust, they are no longer available to their original owner(s). This is the result of the irrevocable properties of the trust. There is no going back.
With a revocable trust, the trust is created, and a trustee is chosen, the trust is the “technical owner,” but its revocable nature means the estate world considers all of the assets as belonging to their original owners. So, for example, your home and land may be in a revocable living trust to protect your heirs from certain taxes or fees, but the home is still 100% yours until the trust is altered or you die and your trustee begins following the trust’s instructions.
Since the owner retains complete control of the assets in a revocable trust, this is typically considered the best way to protect the trust’s assets. However, as mentioned above, life changes all the time, and trusts typically change with them. A second marriage, unforeseen medical expenses, and changes in other family dynamics can alter how the asset’s owners choose to distribute them after they die. As a result, most people consider a revocable trust to be the best way to protect assets.
There are exceptions. Let’s say that hard times fall on a family and creditors are after assets to make up for monies owed. In that case, the revocable trust assets are legally available to them. You may have to sell a piece of property or liquidate some of your investments or retirement funds to pay them off. If those assets are in an irrevocable trust, you can’t touch them, but (in most cases) neither can creditors or anyone else.
Federal estate taxes
Trusts are largely a feature to protect a client’s best interests when it comes to facilitating assets as easily as possible and avoiding unnecessary taxes and fees. Read Understanding Taxes and Trust Distribution to learn more about that.
In the world of revocable and irrevocable trusts, the fourth difference lives in the domain of federal taxes. Current tax laws state that married couples are free of taxation on assets of $22 million or less. Once an estate’s value exceeds $22 million, taxes begin to accrue. If you have an estate worth more than $22 million, your financial advisor or estate attorney may suggest dividing your estate, placing some into an irrevocable trust, so that both balances are viewed separately and no taxes are owed on either. By doing this, the portion of the estate owned by the couple remains under the $22 million mark, and the remainder of the state is owned by the irrevocable trust.
These are general differences between revocable and irrevocable trusts. You should never create any trust without the assistance of an estate attorney. However, that recommendation is exponentially important if you’re considering an irrevocable trust. As you can imagine, the stakes are high since the trust cannot be changed. You need to be absolutely 100% certain you are making the wisest and most financially sound decision for your estate before executing an irrevocable trust.
Would you like assistance learning more about whether your estate would benefit from the creation of a revocable and/or an irrevocable trust? Schedule an appointment with Tseng Law Firm. (510) 835-3090. We work with you to create a custom plan tailored to your specific goals and objectives.