Eight year old Sally was watching TV one lazy Sunday morning when an interview aired between a local estate planning attorney and a news reporter. The topic was the irrevocable trust, a term Sally had never heard before.
So she asked the smartest person she knew.
“Mom, what does ‘irrevocable’ mean?”
“Well”, Mom said, “it means unchangeable. But how is the word used?”
Sally replied haltingly, “Irrevocable trust.”
Mom had to admit, this was a new term for her as well.
Which got her wondering what it meant for her family.
So for all the curious Moms, Dads…and kids…we present this explanation.
Revocable v Irrevocable Trust
The differences between revocable and irrevocable trusts are key, as each type of trust serves a specific purpose. Your estate planning attorney is best equipped to help you make an informed decision about your best option.
The Revocable Trust allows you to leave specific instructions governing the post-death distribution of assets to your named beneficiaries, and ensures they can avoid probate court, a specialized court dealing with estate matters. The main purpose of a revocable trust is avoidance of probate and simplification of the transfer of assets to your beneficiaries. The word “revocable”, by definition, means “cancelled”. Therefore, a revocable trust may be altered or cancelled – an important factor when planning the management of your estate, because it could mean that the asset protection you thought you had secured could be changed upon your death. For example, the revocable trust does not protect your assets from creditors or lawsuits. And since you continue to own your property, property values are included upon your death in calculating taxes.
An Irrevocable Trust is a superior form of asset protection, even if you are of average means. The main purpose of the irrevocable trust is asset protection – saving on estate taxes, eliminate probate, and protecting assets from creditors. The word “irrevocable” implies that changes cannot be made to the trust under any circumstances. (Some exceptions to this rule exist, so ask your estate planning attorney.)
Generally, assets are taken out of your name and placed in the trust where they wait safely for distribution to your beneficiaries. Until such time, no one – not even you – can access assets placed in trust. Since you no longer own property (it is owned by the trust), property avoids probate and, depending on the type of trust, can be excluded in calculations of total property value upon your death for tax purposes A prime benefit of elder planning is to obtain Medicaid benefits in the event you may need to move to a nursing home. The irrevocable trust allows you to plan five years ahead, securing assets for your named beneficiaries.
A trustee is appointed to manage the irrevocable trust; generally, this can be a family member or an unbiased 3rd party depending on your situation. The Trustee exercises independent control over assets of the trust and is bound to uphold the provisions of the trust.
But What about Sally?
Once Mom learned the differences between the revocable and irrevocable trust, it was time to answer Sally’s question. Mom explained, “Sally, I’ve done some reading about your question, and learned some interesting things. You know how you always tell me and Dad you want to live in this house forever? Well, if we set up a revocable trust, you could legally live here for the rest of your life. But we can take one more step that will be even better…the irrevocable trust. Why don’t you come with us when we visit our attorney? He can explain it much better.”
Which type of trust is best for you? This depends on your ultimate asset protection goals. Estate planning laws are complex, so always consult with a qualified attorney. Contact St. Louis estate planning attorney Brian Quinn for knowledgeable assistance.