Mid-late summer greetings, everyone! I've wanted to send this message for several weeks, but didn't want to interfere with your World Cup or Tour de France or British Open viewing - or to jinx that New England team that's suddenly showing some life and whose name was not to be mentioned to avoid, you know . . . .
The subject for today is revocable versus irrevocable trusts, and when and for what purposes one or the other of them might be appropriate.
Let's start with the easy one that most people are thinking about when they mention trusts: the revocable variety. These are quite common today, because they're the most flexible and solve lots of typical concerns. They let people serve as their own trustees to deal with the property held in the trusts' names, so no expensive lawyer or professional trustee needs to be involved, and as the name implies, they can be changed or even eliminated if that seems reasonable or necessary later on. Plus, we still have total control over use of the trust assets, and there aren't any negative impacts for tax purposes because the IRS still considers what's held by them to be our own property, on account of that total control we still have.
Most importantly perhaps, revocable trusts allow people's estates to be resolved without probate administration, the judicial process that slows everything down by requiring lots of filings of documents with the probate court - like asset inventories and accountings - and then by waiting for some judge to get around to reviewing and approving them all. Just 'cause I was one of them doesn't mean I can't call the kettle black.
In addition, there may be young beneficiaries involved - like children or grandchildren - or maybe others with special needs - say, disabilities or problems like substance abuse, marital trouble or financial insecurity - all of whom may need their funds disbursed to or for them by trustees who can provide supervision and help ensure better choices. Revocable trusts can serve well in those situations, whereas simple wills for those beneficiaries would likely mean they'd receive their distributions on their 18th birthdays, while probably still in high school. I think I was pretty responsible at that age, but I'd have been thinking a '65 Mustang convertible was a perfectly sound investment, instead of a college tuition fund.
What revocable trusts won't do for you, however, is keep their assets from being reached by creditors like credit card companies or medical facilities or from being counted toward Medicaid eligibility. That's where irrevocable trusts sometimes enter the picture.
Irrevocable trusts are just what they sound like. Their assets generally aren't any longer owned by or available to the people who created them - they don't even allow us to serve as trustees - and, of course, they generally can't be amended or revoked just because we may later change our minds. However, the advantages may be that the trust assets aren't reachable by our creditors or counted toward things like Medicaid eligibility (usually after a period of 5 years), and if we (maybe you!) have significant wealth, they won't be included as our assets for federal estate tax purposes.
One common use of irrevocable trusts is to hold life insurance policies that pay off to the trust when we're gone, in order perhaps to provide ongoing funds to help our beneficiaries for as long as the assets last, sometimes for generations beyond us. They may also be used to hold family vacation properties, in order to ensure those precious assets aren't just sold as soon as we're gone and to create a structure for managing those properties as more and more descendants come along to complicate things.
There's also a relatively new form of irrevocable trust that's now available in New Hampshire called an asset protection trust, which I've previously mentioned and can be reviewed in our Food For Thought archives. That one may be of interest because although it's an irrevocable trust, it does permit the one who funds it to receive income distributions from the trust assets, while shielding the assets from creditors' claims - that is, as long as the claims haven't already materialized. That would likely be way too good to be true.
I think you can see that the kind of trust to consider will depend on the specific goals we're trying to accomplish. Most of us will choose the revocable variety, not only for its flexibility and retained control, but also because most people don't want to part with use and enjoyment of their assets after working a lifetime to accumulate them.
My further advice is to enjoy this beautiful afternoon and to postpone contemplating this piece until another day when it's raining cats and dogs (or as my Florida cracker mother used to say, when it's a frog strangler)!