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TRUSTS

Revocable, Irrevocable Living Trusts, & Testamentary Trusts

Types of Trusts

What’s the Difference Between a Living Trust and a Revocable Trust?

A “living trust” and a “revocable trust” usually refer to the same thing, although technically not all living trusts are revocable. But all revocable trusts are living trusts, so “revocable living trust” tends to be abbreviated to “living trust.”

Taking a step back, trusts can be grouped in two ways, depending on:

  1. When it takes effect.
  2. Whether it can be modified or accessed after it takes effect. 

A trust that is designed to take effect during your lifetime is a “living trust” (also known as “inter-vivos”), whereas one that takes effect when the grantor dies is a “testamentary trust.” One that can be modified by the grantor, even after it is finalized, is a “revocable trust.” An “irrevocable trust” is one that cannot be modified, even by the grantor, once it goes into effect. 

Nolo offers a helpful breakdown of the terminology, here are the key points:

Revocable living trust

A trust that can be revoked and that takes effect during the life of the grantor. Becomes irrevocable at the death of the grantor. Usually made to avoid probate.

Testamentary trust

A trust created by instructions created in a will and that takes effect at the grantor’s death. Usually testamentary trusts are irrevocable, for example, a child’s trust made to name a trustee for property left to a minor.

Irrevocable living trust

A trust that cannot be revoked and that takes effect during the life of the grantor. Usually made to transfer wealth, protect assets, or reduce taxes.

If this still seems a bit confusing, don’t worry. For most people, the most relevant distinction to keep in mind is your ability to alter the provisions or to access the assets in a trust. So it’s best to think about a trust primarily in terms of whether it is revocable or irrevocable. Each of these has its own unique advantages.

Revocable Trust

This is a popular estate planning tool because it allows you to direct how your assets will be used while still allowing you to access and modify the trust. When people refer to a “living trust” this is typically what they have in mind (but remember that living trusts can also be set up as irrevocable, depending on your needs).

With a revocable living trust, you maintain control over all your assets and you can modify or update the provisions any time while you’re still alive. This adds important flexibility that allows you to change the terms as your circumstances or wishes change.

Advantages of a Revocable Living trust​

Bypasses Probate

If you don’t have any estate plans in place when you die, or even if you have a will, your estate will go through probate court before anything is passed on to heirs. This is a specialized court that deals with the property and debts of a person who has died. In a probate hearing the court will assess whether there are creditors who need to be paid and ascertain the proper beneficiaries of any remaining assets.

Probate can be a lengthy and costly process. It’s often confusing and emotionally draining and loved ones will need to deal with attorneys and court appearances. Fees will eat away at your estate and it can drag on for months.

Fortunately, assets held in trust do not require a probate proceeding. This allows heirs to access their inheritance right away and avoid the uncertainty and emotional toll of months of court proceedings.

Protects Your Wishes

A living trust allows you to control how assets are used, not only after you are gone, but also during your lifetime should you become incapacitated.

You will spell out precisely to whom, how, and when your trustee should distribute assets. Whether you just want to make sure the right people receive their inheritance, or if you want more direct control over how your assets are used (say, by setting up an educational fund for future generations), this ensures that your estate is managed according to your wishes.

Provides Flexibility

The key difference between revocable and irrevocable trusts is that you can modify a revocable trust however you like at any point during your life. As your situation changes over time you may want to add or remove heirs, change the amount of an inheritance, or modify other provisions. A revocable trust gives you the flexibility to make these changes.

Maintains Privacy

Finally, because they bypass probate court, assets in a trust can be managed privately. This is in contrast to a probate proceeding that is public record; probate requires the public reporting of all assets in the estate.

Disadvantages of a Revocable Living trust​

No Protection from Creditors and Lawsuits

Because you still maintain control of everything in a revocable trust and have access to it, assets are not protected from creditors or lawsuits.

No Tax Benefits

They are not tax shelters and do not provide any special tax benefits.

Irrevocable Trust

An irrevocable trust has all the same components of a living trust except that you can not alter it after it takes effect.

But why would you sacrifice your ability to make changes?

By technically giving up your ownership and the ability to access assets, irrevocable trusts provide some very significant benefits. And what’s more, even though you will have given up legal access to the assets you may still be able to benefit from these assets, depending on the terms of the irrevocable trust.

Advantages of a Irrevocable Living trust​

Irrevocable trusts are primarily about protection.

Like revocable trusts, an irrevocable trust protects your wishes, bypasses probate, and is administered privately. The main difference is that an irrevocable trust also provides protection from taxation, creditors, and lawsuits. And because you don’t have access to the funds it can also remove assets and income from being ‘countable’ against public funds.

This can protect eligibility for public programs like Medicaid, SSI, or VA benefits while protecting the assets themselves from being spent down.

Protects Assets from Creditors and Lawsuits

If you have an irrevocable trust for all your assets, then the trust actually owns those assets. That means creditors can’t reach them. Likewise, because you do not maintain control of your assets or have direct access to them, they are protected from any lawsuits against you.

Tax Benefits

Estate and gift taxes are hefty taxes that impact the transfer of inherited and gifted property. When you pass on your estate, a significant portion of it (as much as 40 percent!) may be lost to taxes without proper planning. But since you’ve given up ownership of anything listed in an irrevocable trust, it’s technically owned by the trust and will not be taxed when you die.

Access to Government Programs

Many public benefits programs like Medicaid, VA pensions, or SSI have strict eligibility rules based on income and assets. An irrevocable trust can lower your taxable income and render your assets not ‘countable’ so you (or a family member) can maintain eligibility for these programs without having to spend down your assets.

Disadvantages of a Irrevocable Living trust​

You Can't Modify It

Irrevocable trusts can’t be modified once they take effect—they’re irrevocable. Since you don’t technically own what you put in it you won’t be able to access or change an irrevocable trust. In practice, it may be possible to make changes but even in a best-case scenario, this will require you to go through a legal process, whereas a revocable trust allows you to make changes at any time.

The rigidity here can be a major drawback, but for those who don’t need the flexibility, the tradeoff could be well worth it. For folks with more complex needs, it’s not uncommon to see more than one type of trust used in conjunction, alongside other estate planning tools.

Common Types of Irrevocable Trusts

These are created from your Last Will and Testament and are typically created to preserve assets for minor children, children from prior marriages, spouses, or beneficiaries with special needs. These trusts protect against an inheritance falling into the wrong hands or being spent unwisely.

For Medicaid, planning can be critical; with proper advance planning, the MAPT will preserve assets and allow an individual to qualify for Medicaid without impoverishing their spouse or loved ones.

The VAPT will preserve assets, especially the primary residence, and allow a Veteran or their surviving spouse to not only maximize the VA pension benefit but also preserve assets to cover the increasing costs of long-term care.

I Need a Trust, What’s My Next Step?

The basic concept of a trust isn’t that complicated, but its enormous utility comes from its adaptability—how much you benefit from one will depend on how well it is tailored to your situation

Boilerplate templates can offer a good starting point, but they’re deliberately nonspecific in order to apply to the greatest number of situations. It’s not a good idea to rely on templates and online forms alone because there are so many unique variables that must be considered. It might not be worth the cost savings if a trust doesn’t end up functioning in the way you intended. 

Still, you can do some of the preliminary planning on your own to save time and trim some of the expense from an estate planning service. You can get started right away by identifying your goals, as well as the people and property that you want included in a trust (see above How Do I Create a Trust).

We Can Help You Set Up A Trust in Texas

Consult an expert estate planning attorney to help you match you with the appropriate trust to meet your goals. To get started, schedule a free consultation by filling out the form below.

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At Holman Law, we understand that sometimes things just don’t go according to plan. What if there is no will? What if you need access to funds immediately? We can help you address these issues as soon as possible so you can carry out your responsibilities to the estate to best of your abilities. Get in touch right now to schedule a consultation.

Many people think they should create a trust, but they don’t quite understand how it might benefit them. A revocable trust can both mitigate your tax burden and help beneficiaries avoid long and costly probate processes. Before you start a trust, though, you must ensure it will work for your goals. If you don’t, you may be wasting time and money and create a big mess for your family. 

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The Manchester Living Podcast’s Brian Levy recently hosted Jeff Kort, a Dallas-area financial advisor, and myself, Steve Holman, to discuss the ins and outs of elder law. You can watch the video right here, or look below for 5 important takeaways from our conversation.

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