Revocable versus Irrevocable Trusts
“Irrevocable Trust” sounds so formal and intimidating. Also, there are two very different pronunciations. Regardless of how you pronounce “irrevocable,” it can be intimidating if you are not properly advised during the drafting process. When a person creates an irrevocable trust, they relinquish ownership and control of the assets they are transferring to the trust. The assets are then controlled by the Trustee appointed in the trust document. The Trustee must control those assets in accordance with the rules outlined in the trust document. It is crucial that you are satisfied with the trust document before signing it, because unlike a revocable trust which can be amended at will in most cases, there are only a few limited circumstances where an irrevocable trust can be amended or terminated.
One may wonder, given the rigidness and formality of an irrevocable trust, why someone would ever choose to use this type of trust. Because of the nature of its limitations, often necessary when a person chooses to give up ownership and control of an asset, irrevocable trusts can offer many benefits a revocable trust cannot. (Check here for more on the pros and cons of a revocable trust) An irrevocable trust, when funded properly, can create significant tax savings by removing the assets from a person’s taxable estate. The right irrevocable trust can also offer asset protection when facing long term care costs. In many cases, the assets being placed in the irrevocable trust are assets a person can afford to no longer have ownership and control over. By taking advantage of the trust benefits, the assets are actually more beneficial to the beneficiaries than had the same beneficiaries inherited the assets when the grantor died.
A revocable trust becomes irrevocable upon the death of the grantor. (Not sure who a grantor is? Check out my post on basic trust terms) This is because the person who retained control over the assets in that trust is deceased and no longer able to exercise the power to revoke the trust. The opposite is not true for an irrevocable trust as it stays irrevocable its entire existence. It is very important to understand the trust document in its entirety as well as the possible ramifications of the document prior to signing it. Once it is signed and funded, it is very hard to undo. Setting up an irrevocable trust should only be done after consultation with an experienced estate planning attorney who will ensure you have an understanding of the purpose, and long-term and short-term implications of utilizing this type of trust.