Let’s be honest, the talking heads on the news recommend trusts as an estate planning tool. What kind of trust is better, though? Revocable trust or irrevocable trust? We recommend BOTH revocable trusts and irrevocable trusts, but which type is “better” depends on several factors.
First of all, what’s the difference between an irrevocable trust and a revocable trust?
A revocable trust can be revoked or changed during the grantor’s lifetime. The “grantor” (sometimes also called the “settlor” or “trustor”) is the person initially establishing the trust. This means that if you create a revocable trust during your lifetime, you can change your trust so long as you have mental capacity.
An irrevocable trust, on the other hand, can neither be changed nor revoked during the grantor’s lifetime. In most scenarios, this means that you can’t change your irrevocable trust document after initially establishing the irrevocable trust.
As Texas estate planners, we typically strongly prefer the flexibility that revocable trusts offer. Why on earth would anyone want a permanent and unchangeable trust?
Flexibility is King for Most Estate Planning Clients
For the vast majority of our estate planning clients, once they hear that an irrevocable trust is permanent and unchangeable, we might as well stop talking. This is such a deal-breaker to so many people, that they don’t even want to consider any sort of irrevocable trust.
That said, some estate planning clients balance the lack of control with the advantages of irrevocable trusts. Below we discuss some of the advantages of irrevocable trusts over revocable trusts.
When Irrevocable Trusts Are Better than Revocable Trusts: Reason #1: TAXES
Raise your hand if you love paying taxes! Wait, we don’t see any hands raised. No one? No one loves paying taxes?
Irrevocable trusts can minimize estate taxes upon your death. If you permanently and irrevocably transfer assets into your irrevocable trust prior to death, then the assets transferred in are not part of your “estate” for federal estate tax purposes. If you have too much in assets at the time of your death, your estate will be subject to estate tax. If you don’t technically own the assets you previously transferred into the irrevocable trust, then your estate for taxation purposes has a lower value. This is hugely valuable for wealthy estate planning clients, because it can save thousands or even millions of dollars for the trust beneficiaries.
When Irrevocable Trusts Are Better than Revocable Trusts: Reason #2: GOVERNMENT BENEFITS
If you need to qualify for means-tested governmental resources, such as Medicaid, if you don’t technically own the assets you’ve transferred into the irrevocable trust–you appear very poor to the government. Some governmental benefits require you to be poor before you qualify. Before you go transferring all of your assets into an irrevocable trust so that can qualify right away for Medicaid, keep in mind that there are complex rules for doing so. Consult with an estate planning attorney at least five years before you think you might need Medicaid.
When Irrevocable Trusts Are Better than Revocable Trusts: Reason #3: YOUR BENEFICIARIES HAVE “ISSUES”
Consider this scenario: You love your child dearly, but despite being 45-years-old, he just simply hasn’t grown up yet. Is it wise to give that “child” a sizeable lump-sum inheritance upon your death? Might that sudden inheritance actually do such a beneficiary more harm than good?
You can stretch out distributions to your beneficiaries using an irrevocable trust. Instead of giving a lump-sum distribution, the beneficiaries can distributions over time through the irrevocable trust’s trustee. Meanwhile, the assets held in the irrevocable trust protect against the beneficiary’s creditors and against lawsuits against the beneficiary.
When Irrevocable Trusts Are Better than Revocable Trusts: Reason #4: ASSET PROTECTION
Many doctors and lawyers have assets in irrevocable trusts. Why are irrevocable trusts more popular among doctors and lawyers? Because people just love to sue doctors and lawyers, plus doctors and lawyers tend to have substantial assets.
If you transfer assets into an irrevocable trust during your lifetime, you keep yourself as the beneficiary, and you give up all control of the assets of the irrevocable trust–then the irrevocable trust offers protection against lawsuits against you. The irrevocable trust, unlike a revocable trust, offers asset protection.
When Irrevocable Trusts Are Better than Revocable Trusts: Reason #5: THERE ARE A MILLION OTHER REASONS AN IRREVOCABLE TRUST
Okay, maybe there aren’t a million other reasons that an irrevocable trust can be better, but there are many…
– For charitable purposes
– For marital estate planning purposes (especially when there are blended families)
– To own life insurance
– To own property insurance
– Potentially lower capital gains taxes
– Protection from the nursing home
This Discussion of Revocable Trust vs. Irrevocable Trust Is Very Complex
If there’s one takeaway from this article, it’s this: A revocable trust is not always better than an irrevocable trust, or vice versa.
The answer to the question, “Which is Better, An Irrevocable Trust or A Revocable Trust?” It’s the lawyers answer to just about any question…
Don’t be afraid to talk with an estate planning attorney. Don’t confuse your Google skills with an estate planning attorney’s law degree and experience.
To ask a legal question or get legal help from the Texas estate planning attorneys at Shutt Law Firm, use the online contact form to the right or call (214) 302-8197. If you prefer to meet at the office in person, the attorneys will gladly offer a free consultation.
Visit www.ShuttLawFirm.com for more information on basic Texas estate planning documents, Texas irrevocable trust creation, Texas revocable trust creation, trusts for probate avoidance, and the benefits of wills vs. trusts in Texas.
Shutt Law Firm’s office is conveniently located just north of Dallas, Texas, and just South of Plano. The law office is near the intersection of highway 75 and Arapaho Road in Richardson, TX.
You can also call the estate planning attorneys at (214) 302-8197 for more information on the topic discussed in this article or to discuss a different legal matter.
Please consider the Shutt Law Firm if you want to know about the Texas estate planning, or you need Dallas Estate Planning Attorneys serving Richardson, Plano, Allen, McKinney, Garland, Addison, Rockwall, TX, Collin County, Dallas County, or surrounding North Texas area.
DISCLAIMER: Nothing in this brief article constitutes legal advice. The information provided herein is merely provided in the spirit of education and is believed to be accurate as of the time it was originally prepared, and laws change. If you have a legal question, you should consult a lawyer for your specific legal situation. Further, nothing in this article shall be construed to have started an attorney-client relationship. No such relationship exists until both you and and an attorney at Shutt Law Firm sign an engagement letter.