Trust Issues? Breaking Down Revocable vs. Irrevocable Trusts

Trusts can feel like a mystery - are they just for the super-wealthy? And what exactly is the difference between a revocable and an irrevocable trust? And, most importantly, is a trust something that you actually need?

If you’re exploring estate planning options and live in the Western New York area, we would be happy to help you with trust planning.  Understanding some of the basics of trusts can make a huge difference in managing and protecting your assets, and, in turn, you and your loved ones.

Let’s dig into the world of revocable and irrevocable trusts, break down their key differences, and help you figure out which option might suit your long-term estate planning goals.

What Is a Lifetime Trust, Anyway?

At its core, a trust is a legal arrangement that allows you (the grantor) to transfer assets to someone you name as a trustee, who manages those assets on behalf of your chosen beneficiaries. Trusts can offer protection and control over how your assets are managed and distributed.  (Just a quick tip: when you see the word “assets” think of property - you can have different kinds of property but the word “assets” is meant to include any kind of property you own).

But, not all lifetime trusts have the same goals, which is why it’s important to note the differences. The two lifetime trusts break down into two main forms: revocable trusts and irrevocable trusts.  A main difference between them is found in the name itself!  Whether a lifetime trust can be changed or amended by the grantor after its creation is a significant reason to set up one trust versus the other.  You can also check out more about trusts and wills right here on our website!

Revocable Trusts: Flexibility at Its Finest

Let’s start with lifetime revocable trusts! A lifetime revocable trust (often called a living trust) allows you to maintain control over the assets you place in the trust while you are alive. You can make any needed changes easily, including adding or removing assets, changing beneficiaries, making changes to the trust terms, or even dissolving the trust entirely in the event your situation changes. This flexibility makes lifetime revocable trusts a very popular choice for many families for preparing for the future and organizing their assets and overall estate matters.

Benefits of a Revocable Trust:

1. Avoiding Probate - Assets in a lifetime revocable trust don’t go through probate, saving time and reducing court and associated probate costs for your family. The New York State Unified Court System highlights how probate can be a lengthy process, which a trust can help bypass.
2. Beneficial Income Tax Planning - Placing assets in a revocable trust can mean a big difference when it comes to income tax planning. People sometimes mistakenly think transferring assets directly to others is the best planning and overlook what this may mean for income taxes into the future upon a sale of the asset. (More on this later!)
3. Step-Up in Basis Upon Death - Assets within your gross estate receive a “step-up” in basis which can be a much better way to plan than outright gifting. So often, families make mistakes in making decisions without consulting with an estate planning attorney. This kind of forward thinking can save a lot in tax dollars down the road!
4. Protection for Special Needs Beneficiaries - A trust can hold assets to benefit disabled individuals while preserving critical government benefits.
5. Great Consideration for Blended Families - A trust can be a great way to clearly designate assets, avoiding confusion and conflict between family members at the time of your death.
6. Planning for Incapacity - If you become incapacitated, a successor trustee (or even a co-trustee if set up this way) can manage the trust assets on your behalf without the need for court intervention or reliance on a Power of Attorney which can have various problems and complications.
7. Better Control and Privacy - A lifetime trust can help you by having better control of your assets, keeping matters private and allowing assets to be distributed in a more tailored manner. Unlike a will or power of attorney, a lifetime trust is a “living, breathing” document that can greatly help with asset management as soon as it is set up and well into the future. Unlike a power of attorney, a lifetime trust has provisions and instructions about how your assets should be managed, handled and distributed along with various protections for yourself and other beneficiaries. Unlike a will, a lifetime trust has more robust provisions providing for a whole host of matters from dealing with assets and beneficiaries to determining successor or co-trustees and providing roles for other individuals, such as a “Trust Protector”. As well, a lifetime trust can also have “sub-trusts” included for various beneficiaries and situations. By and large, a lifetime trust creates a better backdrop to plan for the future. As well, a lifetime trust can continue for some period of time, so it becomes a great way to organize assets, as opposed to piecemeal planning.
8. A “Pot” to Use for Beneficiary Designations - You can name the trustee of the lifetime trust as the beneficiary on assets (think bank accounts, investment accounts, life insurance, retirement accounts, and so on) for when you pass. Of course, you can re-title assets into the name of the trust while you are living, but, sometimes, there are reasons to only have the trust receive assets upon your passing. The beneficiary designations can name the trustee of the trust and then the trust can be that one place that you provide for beneficiaries in a holistic fashion. This can really deal with assets in a more organized fashion. As well, you can make changes to the trust provisions as opposed to each beneficiary designation into the future. 

Drawbacks to Consider:

• No Tax Protection - A revocable trust won’t protect your assets from creditors or potential estate taxes because the assets are still considered yours in those contexts.
• Funding is a Must - To ensure the lifetime trust meets your goals, you will need to actively transfer the assets you want in the trust actually to the trust, which requires some work.  It’s do-able work, but, does take time. 

Irrevocable Trusts: Strength in Stability

While a lifetime revocable trust is changeable, a lifetime irrevocable trust is largely considered “permanent”.  There are ways to go about making a change to an irrevocable trust, but, this is not what the trust is meant for as it is really set up with the idea that is will not be changed or amended.  If a change, amendment or even revocation of the irrevocable lifetime trust is desired, it would mean the purpose of the trust will be defeated; as well, there can be complications and difficulties which would be determined at such a time.  In the case of a lifetime irrevocable trust, the trust agreement typically would not have you as the trustee.  The reason being is that you do not want to have too much control over trust assets as this could defeat the purpose of the trust. This would be heavily fact specific and be worked through with your estate planning attorney.  As well, when you set up the lifetime irrevocable trust, you are essentially giving up ownership and control of the assets placed in the trust.  You may also be transferring assets or the trustee may be purchasing assets so that these assets are not part of your gross estate for estate tax purposes.  Generally, there is an underlying theme of inflexibility with a lifetime irrevocable trust and this can seem intimidating.  However, there are reasons that this kind of trust is perfectly suited for ones estate planning goals and if done properly, the benefits can be significant!

Benefits of an Irrevocable Trust:

1. Asset Protection - Assets in an irrevocable trust are shielded from creditors, lawsuits, and long-term care costs. For example, if you incur significant medical bills prior to your death, these assets are protected from paying those bills. Additionally, if you are a business owner in New York State, an irrevocable trust can help protect your personal assets from business-related lawsuits or debts.
2. Beneficial Income Tax Planning - As with a lifetime revocable trust, you can still achieve beneficial income tax planning with an irrevocable lifetime trust.  It will just be a bit more nuanced as far as determining your overall goals and what you want to achieve in this regard. 
3. Step-Up in Basis Upon Death - As with a lifetime revocable trust, you can still achieve the step-up in basis with assets in a lifetime irrevocable trust.  Just as with income tax planning, it will just be a bit more nuanced as far as determining your overall goals and want you want to achieve with estate tax planning. 
4. Estate Tax Savings - If estate taxes are a concern, you will can consider removing assets from your taxable estate by transferring them to a lifetime irrevocable trust.  You will do so with the overall goal of reducing Federal and/or New York (for those with New York estates) estate taxes. The Internal Revenue Service (IRS) outlines how these trusts can help with long-term tax strategies.
5. Legacy Preservation - You can ensure your estate plans will not be changed into the future and that what you have put in place through the lifetime irrevocable trust will stay intact.  With that in mind, assets like family heirlooms, real estate, or even a business are preserved and distributed according to your exact wishes, such as a home or property going to specific beneficiaries. 
6. Privacy - Just as with the lifetime revocable trust, there are benefits of trust planning, in general. Privacy is a big one so it’s worth mentioning again, although benefits of trust planning cross-over between both the lifetime revocable trust and the lifetime irrevocable trust.

Potential Drawbacks:

• Loss of Control - Once assets are placed in an irrevocable trust, you can’t change the terms all on your own or take back assets as you wish.  This makes it critical to carefully plan the terms of the trust - No take backs!
• Complex Setup - Creating an irrevocable trust often requires a more serious understanding as it is meant to stay in place for the benefits that are initially desired to stay-intact.   Be prepared to think long-term and work with an experienced estate planning attorney to ensure the trust aligns with your goals and complies with the various laws, including New York State laws for trusts set up in New York. 

Choosing the Right Trust for Your Estate Plan

Deciding between a lifetime revocable and a lifetime irrevocable trust (as with most components of a well thought-out estate plan) depends on your unique circumstances and goals. Here are a few of the key factors that we always consider with our clients:

1. Flexibility vs. Protection - If maintaining control of your assets is important, a lifetime revocable trust is likely the better fit. If asset protection, keeping plans in tact for the future, or even estate tax savings are among your priorities, a lifetime irrevocable trust may be the way to go.
2. Family Needs or Red Flags - A revocable trust can really play a key factor in helping with family needs or overcoming red flag situations.  Even if a lifetime irrevocable trust is not desired, a lifetime revocable trust can be a fantastic planning vehicle for situations where there are concerns or issues with or between beneficiaries or family.  Do you have young children or beneficiaries with special needs? Do you have out-of-state property?  Do you have out-of-state or even-out-the country family or beneficiaries?  Do you have estranged children or estranged spouses?  Do you have family who may cause complications or problems, either during your life or at your passing?  Are you in a relationship but not married and want to benefit your significant other?  And, so on!  The possible reasons and situations here are endless!  Just know that a lifetime revocable trust can really help with plans for the future and keeping your desires intact! 
3. Two trusts - It’s certainly possible to set up two trusts, one lifetime revocable trust and one irrevocable lifetime trust!  Each has their own significant purpose.  And, remember, if you set up both kinds of lifetime trusts, you can obtain the benefits of both through each trust.  You’ll be figuring where assets would be placed between the two different kinds of trusts.  And, remember, with a lifetime irrevocable trust, keeping your plans safeguarded into the future, having creditor protection and, establishing estate tax savings are among the main goals that factor in.  With a lifetime revocable trust, having the flexibility to change trust provisions, stay in control of assets yourself, and add assets as you go are among the main goals that factor in.  Both lifetime trusts have useful features, so it’s all about having good conversations with your estate planning attorney so that everything can be discussed and tailored to your goals!

Trusts are an important consideration for any estate plan, particularly in New York.

Trusts aren’t just reserved for the wealthy - they’re a tool for anyone who wants to manage and protect their assets, provide an efficient manner to transfer assets, provide a legacy for their loved ones, and ensure one’s wishes are carried out. In places like Western New York, where families often have diverse needs ranging from real estate protection to tax considerations to Medicaid and long term care planning, trusts can be an incredibly impactful, if not a necessary tool in estate planning.

As the American Bar Association reiterates, trusts are an integral part of a comprehensive estate plan, especially for those who want to simplify the process for their heirs and minimize potential conflicts. Ultimately the more that you can organize and plan for yourself and your own estate, the easier the process of handling your assets will be - both during your life and at the time of your passing!

Ready to Explore Trust Options?

We hope that we answered some of your trust-related questions here, but if you still have some left unanswered, never hesitate to contact us! You can also check out our Trusts, Wills, and Legal Documents page on our website that has some additional tips! At RUTH P. GEORGE LAW PLLC, we concentrate our practice in creating trusts and wills for families in Williamsville, Cheektowaga, Depew, and across all of Western New York. Whether you’re considering a revocable or irrevocable trust, a simple will, or have other estate planning questions, we will work with you to design a plan that meets your needs and protects your legacy. Let’s create a plan that gives you and your loved ones peace of mind for years to come!