Revocable vs. Irrevocable Trusts

Often clients come into my office asking what is the difference between a revocable and irrevocable trust. It seems simple – one is changeable and one is not, right? Well, not so fast.

 

Let’s start with the easy one — Revocable Trust. A revocable trust is precisely what it says it is – a trust that is revocable, changeable, amendable. You can create it, you can destroy it, you can change it, you can keep it the same until you die. One thing a revocable trust doesn’t do, ever, is protect assets. It will not protect assets from estate taxes or Medicaid spend down.  Even with that disadvantage, there are plenty of good uses for revocable trusts, such as:

  • Probate avoidance (especially useful if you have real property in two or more states)
  • Maximizing estate tax exemption use (helpful in New Jersey where the estate tax threshold is just $675,000)
  • Protecting your children’s inheritance from divorce or bankruptcy
  • Keeping assets in a bloodline (and away from in-laws, future spouses, or step-children)
  • Planning for beneficiaries with special needs

With a revocable trust, clients set them up with their own money and control them (as trustees) for their lives. Then they choose who is in charge after they both die (if married), and where the money and property go.

So, if a revocable trust is a trust you can change whenever you want, it would follow, then, that an irrevocable trust is one that you cannot change…except that’s not the case. You see, in drafting an irrevocable trust I can reserve certain powers for the grantors (my clients) to allow them to make certain changes during their lifetime. What kind of changes do my clients want to make?

  • Changing Trustees – Clients may want to reserve the right to make changes to who is in charge of their irrevocable trust during their lifetime. While there are some limitations on who they can select to serve as replacements, generally clients are able to make changes to the trustees to continue to serve the goals the planning set out to achieve.
  • Changing Beneficiaries – Clients often want to hold onto the right to choose who gets their money after they die…right up until the time that they die. From inside an irrevocable trust, clients can gain flexibility over where assets go and how their beneficiaries get it.
  • Saving Money On Capital Gains – One of the most important assets we can help protect is the family home. One way to protect it is to transfer ownership into an irrevocable trust. However, using the wrong kind of irrevocable trust can cause hundreds of thousands of dollars of value to be subject to capital gains if clients decide later to sell that home. With the right kind of language in the trust, we can preserve our client’s choice to sell the home later in life and still receive the preferential tax treatment they had while the home was still in their name.

There are many uses for irrevocable trusts, whether protecting assets against long-term care costs, perhaps saving on estate taxes, or shielding assets against liability. These irrevocable trusts do not use the same language and they are not interchangeable. Choosing between them, and the ways we can let clients change them in the future, is where engaging an attorney is essential.

As you can see, the difference between an irrevocable and revocable trust is not so clear-cut. Many times we can achieve a lot of the advantages of a revocable trust with the added benefits of asset protection from inside of an irrevocable trust. This kind of sophisticated planning is benefit our clients enjoy from our focus in this area of law.

Posted by Victor J. Medina

Medina Law Group, LLC