Irrevocable Trust or a Revocable Trust: What is the Difference?

Irrevocable Trust or a Revocable Trust, what is the difference?

A Trust is a relationship more than it is a document.

Revocable and Irrevocable, for a bracelet

Say a mother, Versace, lets her daughter Gap borrow a bracelet for a friend’s engagement party, then travel to Bolivia to another friend’s wedding the following week, and wear it there. It is understood Gap will take care of the bracelet, wear it for a couple of parties and then return it.

Versace, after the first party, tell Gap that she wants the bracelet back and does not want Gap to take it with her to Bolivia. Gap then returns the bracelet. Of course Versace trusted Gap with the bracelet, but always had the ability to get it back, for whatever reason. It was always Versace’s bracelet, for her own benefit. This arraingement is a trust. It was never written down, but that’s what it was.

Say then a few years later Gap has a daughter, Burlington. Versace gives Gap the same bracelet, but since Burlington was only born last week, she gives it to her mother Gap, for safekeeping. This bracelet was a gift to Burlington. Versace, we would expect, cannot get it back. If Versace is sued years later and loses the lawsuit, her creditors cannot get the bracelet from Gap on the theory that it actually belongs to Versace. It’s not Versace’s bracelet any more. Gap has the bracelet, who holds it for the benefit of Burlington.

Organizing Your Affairs

A revocable trust is typically the backbone of an “estate plan.” Estate Planning is the process of organizing one’s affairs. You can organize your affairs for a wide range of purposes, some of which will require a revocable living trust, while some may not. Some of the reasons our clients get trusts:

1. Probate Avoidance.

2. Appropriate distribution to children.

3. Disinheriting a child.

4. Protecting against remarriage.

5. Saving on the federal estate tax.

6. Making sure an unmarried partner or other unofficial family member is not forgotten.

7. Planning for Incapacity.

8. Estate Tax Planning.

9. Planned charitable giving.

10. Liability protection.

11. Income tax planning.

12. Structuring gifts to family members.

13. Business Succession Planning.

14. Being an adult who is responsible for others.

This is not an exhaustive list. As you may guess, some of these things require only a “revocable” living trust while some can only be accomplished through an irrevocable trust. Other things can be accomplished with either a revocable or irrevocable trust.

In an Irrevocable Trust means “irrevocable” ?

One obvious but not necessarily accurate description of an irrevocable trust is that it is the opposite of a revocable trust, that is so say it cannot be revoked. However, irrevocable trusts are “revoked” all the time. The best way to describe what makes for an irrevocable trust is not that it can’t be revoked, but that it cannot be unilaterally revoked by the Grantor, the person who created the trust. It may also not ordinarily be revoked by the Trustee, the person who is supposed to administer the trust. Often a trust can be modified or revoked by an independent person, which may include a judge, a trust protector or a group of people. For example, in some cases, all beneficiaries may decide to change the terms of a trust. If it only affects all the people who have a reason to care, that is enough.

Another wrinkle when it comes to revoking an irrevocable trust is that there may be a cost associated with the decision. Changing the terms of a trust or getting rid of it entirely can have tax implications. Other irrevocable trusts are “split interest” trusts. These trusts are created to give two or more people or entities different kinds of value. For example, a future interest and a present value.

If, for example, there is an interest that goes to the grantor (again, the person who creates the trust) and a future interest that goes to charity, the grantor cannot typically just undo the whole thing in a way that gives nothing to charity. Typically, the grantor obtained multiple tax benefits based on the promise that the trust was irrevocable. So, any undoing of that kind of trust will need to be sensitive to that.

When revocable means “irrevocable”

Another aspect of the division between revocable and irrevocable trusts is that virtually all written “revocable trusts” are meant to be irrevocable at some point. For example, Stringer has a living trust, with instructions to his Trustee Jimmy leaving his estate to his children

Snoop, Bubbles and Bunk. Now after Stringer dies, the trust becomes irrevocable. Jimmy has no ability to exclude Snoop, even if he had a good reason.

Consider Goals and Work from there

When planning an estate, is often best to start with the specific goals, not with the documents. There is usually a reason why someone goes to an Orange County Estate Planning Attorney. A document, including a revocable trust or an irrevocable trust, is not a goal. Trusts are usually pieces of paper with things written on them (though as I described above, sometimes they are oral). By themselves, they may do nothing or in many cases, are harmful. Many people who have spent much of their potential inheritance in litigation costs and too much on the federal estate tax or generation skipping tax can attest to that.