Elder Law, Estate Planning

A Comparison of Irrevocable Versus Revocable Trusts

For estate planning, a wide variety of trust types are available; the most common are revocable and irrevocable trusts. While there is some similarity, these two major categories of trusts have different purposes in your estate plan. Both can substitute for a last will and testament as an alternative way to distribute property, though a trust and a will often exist concurrently. Whether a revocable or irrevocable trust works better for your estate plan depends on what you need the trust to do for you.

The most striking difference between the trust types is as defined in the names. A revocable trust permits changes, amendments, and revocations at any time while you are alive and mentally capable of doing so. In contrast, an irrevocable trust does not permit amendments or revocations of any type while you are alive. The only changes to the terms of the trust are as the trust agreement itself defines and allows.

Both trusts, when properly implemented, permit the bypass of the probate process. A revocable and irrevocable trust will survive your death, and your named successor trustee will be able to distribute trust property free from court interference after you die. The trustee may only distribute assets that the trust owns in title to avoid probate.

Why seek to avoid probate? The process is slow and time-consuming, taking anywhere from six months but in most instances one to three years to complete. Although it varies by state, probate can be costly as the court takes a portion of the gross estate in probate fees even before the deceased’s debts are paid. The fee can be as substantial as ten percent. Finally, probate is a public process, and all documents and information will become part of the public record. Estate debts and assets become public records, as are the distributions of assets. Anyone who cares to look up this public record can know which beneficiary received what and often make targets of inheritors for scams or burglaries.

Both trust types help you control property after you die with conditions you outline as to how to use trust assets once you pass away. Conditions are usually age restrictions, punishments for bad behavior, and incentives to promote good behavior. These conditions must not violate public policy. Revocable and irrevocable trusts can set up conditions regarding distribution while you are alive. However, in a revocable trust, if you create the trust, control the trust as trustee, and are the trust beneficiary, you will NOT receive protection from creditors or others who may have a claim against you. This lack of credit protection in a revocable trust is significantly different from an irrevocable trust.

An irrevocable trust can prevent the distribution of assets to certain entities or people, like a long-term care facility or a creditor. The irrevocable trust must be in place and active before protection from the debt accrued to be effective or be within certain time limits to qualify for government programs such as Medicaid. The irrevocable trust creates a legal wall separating you and your assets permitting the shielding from creditors or long-term medical care costs. Asset protection is one of the most useful aspects of an irrevocable trust.

An irrevocable trust is also a vehicle to shield your multi-million dollar wealth from excessive federal estate taxes to preserve generational wealth. 2022 tax exemptions include:

  • $12,060,000 federal estate tax exemption with a 40 percent top federal estate tax rate
  • $12,060,000 Generation-Skipping Transfer (GST) tax exemption and a 40 percent top federal GST tax rate
  • Lifetime gift tax exemption is $12,060,000 and a 40 percent top federal gift tax rate
  • An annual gift tax exclusion amount increase to $16,000

In summary, both trust types can provide estate planning benefits depending on your needs.

Revocable Trust

  • Permits control of your assets, their distribution, and how they are spent after you pass
  • Permits bypassing the probate process
  • Limits probate if you have properties in multiple states and want to avoid probate in each state
  • You desire to simplify the distribution of your property to your heirs and children when you pass away.

Irrevocable Trust

  • Permits control of your assets, their distribution, and how they are spent after you pass
  • Permits bypassing the probate process
  • You have concerns about future long term medical costs
  • You have implicit trust in your children or other family members to take care of your property
  • You want to preserve generational wealth by protecting your assets from creditors or long-term care facilities
  • You want to protect your assets from potential future lawsuits
  • You want to limit federal estate taxes on your estate

Trust types in estate plans are as varied as those individuals seeking to enact them. To best protect your interests and those of your beneficiaries, meet with a qualified estate planning attorney who can explain the type of trust that best suits your needs. We hope you found this article helpful. If you have questions or would like to discuss your personal situation, please don’t hesitate to contact us. Please contact our Reno office by calling us at (775) 853-5700.

Elder Law, Estate Planning

How Do I Know if I Need a Trust?

This article will help you decide if a trust fits your particular circumstances. For example, maybe you have a disabled child and you want a trust to permit that child to inherit without losing government benefits. Maybe your own or your spouse’s health is heading into difficulties, and you can foresee eventually needing long-term care benefits. Trusts can avoid an expensive, public, and lengthy probate process before your beneficiaries can inherit after you pass. Or, you might be in the classic “trust fund” situation, where you’re concerned that your children won’t be able to manage money wisely.

All these are excellent reasons to consider a trust. But what kind of trust? A quick count shows there are at least thirteen different varieties. Which one is best suited to your needs? Call us.

Here’s the basic idea behind trusts, to help you understand why you might or might not need one.

What is a Trust?

Think of a trust like a treasure chest. You originally bought property or earned money in your own name. You then transfer those assets into the trust’s name – into your treasure chest, in other words. The trust treasure chest becomes a legal entity separate from you, which now holds your property in its, and no longer in your, name.

Then you identify people who will occupy the three roles involved in managing trust property. First, you are the grantor, or settlor, or trustmaker – all those words mean the same thing, the “you” in this case. Second, you appoint a trustee. That person or entity is responsible for managing trust assets and following directions contained in the trust document. Third, you decide whom you want to receive trust assets – your beneficiary or beneficiaries, in other words.

In legal terms, a trust is a fiduciary agreement among you the original property owner, your trustee, and your beneficiary. The trust document contains instructions for what you want to be done with trust property, both for how you want it invested and, also, for how you want trust assets to be distributed when you pass. Trusts are, thus, a highly efficient hybrid between a power of attorney, an asset-management vehicle, and a last will and testament, all rolled into one legal entity and document.

There are two basic kinds of trusts to understand before they split off into their thirteen-or-more different flavors: revocable or irrevocable trusts.

The Revocable Trust

A revocable trust can be thought of like a treasure chest with an open lid. As grantor/settlor/trustmaker of a revocable trust, you can get at trust assets freely.

You yourself can also occupy all three roles in a revocable trust – grantor, trustee, and beneficiary. If need be, you can also tinker with trust terms, by freely amending them to change the directions, beneficiaries, or trustees. Or, you can revoke the whole thing. Before that point, though, the trust document will be there to take care of everything you want it to.

If you should meet with an accident and lose capacity, the terms of your trust will designate a person to step in on your behalf and, thus, avoid the need to go to court to get a guardian for you. The trust will also direct who inherits, thus keeping your affairs private and out of probate court. This feature is especially important if you (formerly) and then the trust (after you created it) own real property in various states. The savings in court costs in that situation could be significant.

The Irrevocable Trust

This is the trust for you if you’re seeing the need for Medicaid long-term care benefits in your future, or you work in a field where suits are common, such as owning a small business or in the construction industry.

The disadvantage to an irrevocable trust, however, is that you will be sacrificing all or almost all control over trust assets, unlike in the revocable-trust situation. Once an irrevocable trust is established, you as grantor/settlor/trustmaker cannot directly alter the terms and, generally speaking, your access to trust money is restricted or entirely precluded – as is required in order to enjoy the potent benefits of this kind of trust.

Think of an irrevocable trust as being like the treasure chest with the locked lid. Your trustee – who generally cannot be you – is the one with the key. You yourself can no longer reach your assets. This relinquishment of control is necessary to shelter your assets from creditors or to protect your assets when entitlement to government benefits would otherwise require you to spend almost all you own first.

There are ways to draft an irrevocable trust carefully, so you can still exert your will over how assets are to be used. Just as in the revocable situation, you can impose conditions that must be met before a beneficiary can receive funds. You can designate how trust income is to be used for specific purposes like college tuition, business start-up, or travel. You can also authorize a person or entity as a “trust protector,” who can alter trust language, correct drafting errors, or create a new similar trust if the law changes.

And there you have the basics. Now you’re ready to decide whether you need a credit shelter trust, or a charitable trust, or a qualified terminable interest trust, or a blind trust, or – just come see us to figure out all the rest!

Trust Caveats

Some sophisticated trusts do convey tax benefits, but, for the most part, IRS considers revocable trusts to be invisible. You as grantor/settlor/trustmaker will still pay tax on the revocable-trust income, albeit at your individual rate and not at the prohibitive trust rate.

As for estate taxes, trusts have no effect – but, at least regarding federal estate taxes, those are currently moot for most people. They are not incurred until the value of the estate exceeds $11.4 million as of 2019. Some states do impose estate and/or inheritance taxes; for those states, please consult this website:

Also, keep in mind that revocable trusts provide no protection against creditors. If you lose a legal action, a judge can force you to change the beneficiary of your trust to the winner. Irrevocable trusts are free from that kind of interference.

Still, irrevocable trusts must be established long before you run into that kind of trouble. If you create such a trust while credit problems are looming or have already arrived, you risk that your trust will be undone as a fraudulent conveyance.

Trust Your Attorney

Consult lawyers like us, who have experience and expertise in the trusts and estates area. Custom-constructing a treasure chest to fit your specific needs is a job for our specific skills.

If you have questions or would like to discuss your personal situation, please don’t hesitate to contact us. Please contact our Reno office by calling us at (775) 853-5700.