Revocable vs. Irrevocable Trusts

A living trust can be revocable or irrevocable, says Yahoo Finance’s recent article entitled “Revocable vs. Irrevocable Trusts: Which Is Better?” It is certainly true that not everyone needs a trust, and there are many different types of trusts you can establish. But, when considering a trust, clients need to consider the pros and cons of revocable versus irrevocable trusts.

Revocable Trust

A revocable trust is a trust that can be changed or terminated at any time during the lifetime of the trustor (i.e., the person making the trust). This means you could:

  • Add or remove beneficiaries at any time
  • Transfer new assets into the trust or remove ones that are in it
  • Change the terms of the trust concerning how assets should be managed or distributed to beneficiaries; and
  • Terminate or end the trust completely.

When you die, a revocable trust automatically becomes irrevocable and no further changes can be made to its terms.

The big advantage of choosing a revocable trust is flexibility. A revocable trust allows you to make changes and to grow with your needs. Revocable trusts can also allow your beneficiaries to avoid probate when you die.  Most clients use revocable trusts during their lifetimes, although they might establish irrevocable trusts for other people or to address specific circumstances.

However, a revocable trust doesn’t offer the same type of protection against creditors as an irrevocable trust. If you’re sued, creditors could still try to attach trust assets to satisfy a judgment. The assets in a revocable trust are part of your taxable estate and subject to federal estate taxes when you die, which is usually a good thing, but in some assets isn’t sufficient tax planning.  It also provides no advance asset protection for Medicaid.

Irrevocable Trust

An irrevocable trust is permanent. If you create an irrevocable trust during your lifetime, any assets you transfer to the trust stay in the trust. You can’t add or remove beneficiaries or change the terms of the trust.

Irrevocable trusts are commonly used for creditor protection or tax planning.  There are times, such as when considering long-term care Medicaid in a nursing home, or reducing the size of your estate for estate tax purposes, that you want the asset not in your name and out of your personal control.  The irrevocable trust can achieve that by having the trustee own it instead of you.

Irrevocable trusts created during your lifetime are often done in addition to a revocable trust so that you achieve the particular benefits of an irrevocable trust only for that property which needs the advantage.

Irrevocable trusts are more commonly something you set up to be effective at your death.  We’ve written extensively on this, but it is extremely common to leave your children’s inheritance to them in irrevocable trusts that set the rules by which they benefit from the trust and provide creditor and divorce protection to the beneficiary.  This also works with spendthrift beneficiaries and similar trusts are used when a beneficiary has a disability and is using government benefits.

See here for more:  https://galligan-law.com/how-do-trusts-work-in-your-estate-plan/  

It is worth noting that irrevocable trusts, despite their name, sometimes can be revoked, changed or you can remove property from them.

For example, irrevocable trusts might have a power of substitution allowing you to take out property as long as you put equal value property back in.  Irrevocable trusts can sometimes be revoked or changed by the agreement of all parties (including beneficiaries) although that doesn’t work if minors are involved.  Irrevocable trusts that are broken and no longer serve their original purpose can also sometimes be fixed by a process called decanting.  It involves creating a new trust and “decanting” the assets of the first into the second.

If you are using irrevocable trusts you are working with very sophisticated tax and creditor laws, so you’d have to check with your attorney if those options will fit with the trust you are creating.  It is also not something we like to rely on, which is one of the reasons irrevocable trusts are used less.

Speak with an experienced estate planning or probate attorney to see if a revocable or an irrevocable trust is best for you and your goals.

Reference: Yahoo Finance (Sep. 10, 2022) “Revocable vs. Irrevocable Trusts: Which Is Better?”

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Common Estate Planning Terms

There is a current legal trend to avoid using legal terms and to make the language of law accessible for clients.  For example, lawyers use less Latin than they used to.  However, there are some terms that are unavoidable, and it helps to be familiar with them when considering your estate planning, a sentiment echoed by the recent article, “Learn lingo of estate planning to help ensure best outcome” from The News-Enterprise.

Accordingly, I wanted to define some common estate planning terms.  If you are on the fence about creating an estate plan but found this article to get started, you may also want to review this article on the important of having a will.  https://galligan-law.com/understanding-why-a-will-is-important/  

Fiduciary – the person you named to a role in your estate plan and who acts with your best interest in mind.  They owe you a fiduciary duty to act with prudence and loyalty to you.

Principal – the person who creates the fiduciary relationship, especially in a power of attorney.

Agent or Attorney-in-Fact – this is the person named to act on your behalf under a power of attorney.  They aren’t your “power of attorney,” they are your agent.

Within a last will and testament, there are more: testator or testatrix, executor, administrator, beneficiary, specific bequest, residuary beneficiary, remote contingency and even more. There are also many variations on these terms based upon location and common practice.

Testator – (Testatrix is the feminine version of it) is the person who makes a will.

Executor – the person who is appointed in a will to administer an estate.  Note, in Texas you often see “Independent Executor” or references to an independent administration.  This is because Texas has grades of executors, and independent executors largely work free of court supervision.  Most states don’t have this distinction.

Administrator- generally stated, this is the person who administers an estate just like an executor, but who wasn’t named in the will.  So, for example, if you name John Smith, and if he can’t then Kevin Horner to be your executors, and neither serves after you pass away, a third person may be granted permission to administer your estate.  They will be an administrator, and not an executor, because you didn’t name them.

Beneficiaries are individuals who receive property from the estate or a trust. Contingent beneficiaries are “backup” beneficiaries, in case the original beneficiaries are unable to receive the inheritance for whatever reason.  Sometimes you see the phrase per stirpes or by representation or something similar.  These indicate who the contingent beneficiaries if the original beneficiary is deceased.  Generally speaking, these indicate the original beneficiary’s children.

Specific Bequest – these are clauses giving specific property to a beneficiary.  So, for example, “I leave the real property known as 123 Main Street to my daughter” is a specific bequest.  In most cases, it is distributed first.

Residuary beneficiary – these are beneficiaries of the “residuary” or the “residue.”  This means all of the property in an estate or trust that isn’t already distributed.  So, using my above example, if your will says 123 Main Street to daughter, but you also own stock, another house, a car, bank accounts and items in your home and don’t otherwise address those items in your will, then everything except for the 123 Main Street goes to the beneficiaries you list as a residuary beneficiary.  These are often dealt with by percentages or shares.  So for example, “all of the rest, residue and remainder of my estate to my children, by representation.”  If you have three children, they are splitting the residuary in thirds.

In the world of trusts, you often have trustor, trustee and then beneficiaries which are very similar to the beneficiaries described above.

Trustor – Many states have different names for this, we just happen to use trustor.  This is the person who creates the trust.  Other names for it are grantor, settlor or trustmaker.  I’ve even seen founder and originator in my career.  If the trust is created by will, which is often called a testamentary trust, then the trustor is the testator.

Trustee – this is the person who administers a trust.

There are more terms than this of course, but these are some of the most common estate planning terms. Getting comfortable with the terms will make the estate planning process easier and help you understand the different roles and responsibilities involved.

Reference: The News-Enterprise (Jan. 18, 2022) “Learn lingo of estate planning to help ensure best outcome”

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Common Mistakes with Living Trusts

At The Galligan Law Firm, we are fans of using trusts in estate plans.  Trusts are versatile, you can accomplish incapacity planning, probate avoidance, tax planning, asset protection and more with trusts.  However, it’s true, as with all planning, that things don’t always go as intended.  Sometimes people make mistakes with living trusts, and although the trust is still a good plan, it doesn’t create all of the benefits intended.  Yahoo Life’s recent article entitled “Why You Should Put Your House in a Living Trust” explains some of the biggest errors people make with trusts.  However, take that article with a grain of salt, there are a few things I disagree with that I’ll mention later.

First, remember that a trust is a fiduciary relationship in which one party (trustor) gives another party (trustee) the right to hold title to property or assets for the benefit of a third party (beneficiary).  In living trusts, this is frequently the same person, at least during their lifetimes, and then there are new individuals to take over as trustee and beneficiary once something happens to the trustor.

Trusts are created for the reasons I mentioned earlier.  Most people ask about them because they want to avoid the probate process.

Also remember that although trusts are generally associated with the wealthy, almost everyone can use them as many people benefit from them.  I personally think they are associated with the wealthy because high profile deaths often reference trusts.  So, if a very wealthy person passes, say Steve Jobs for example, there will be stories talking about his wealth and how it passed by use of trusts.  His lawyers used those trusts for the benefits I mentioned above, but people only hear about it in high profile cases, so they assume that’s what they are for, not realizing everyone can use them.

All that said, if you are using a living trust, here are a few common trust mistakes to consider:

Failing to retitle your real property.  If you own a home, other land, mineral interests, etc, then transferring it to the trust or arranging for it to transfer to your trust at your death with a lady bird deed or transfer on death deed is very important.  If you don’t, probate may be necessary to gain control of the property and transfer it to your trust.

As a note, the Yahoo Life article is incorrect here and when they mention telling your mortgage company of a transfer.  Transferring your owner-occupied primary residence to your revocable living trust does not trigger a “due on sale” clause in the mortgage.  The Garn-St. Germain Act of 1982, which is a federal law governing mortgages, prohibits that.

Failing to trust fund.  Most clients like the idea of avoiding probate.  However, it is important to recognize that the trust itself cannot collect assets for you.  If you have a bank account with your name on it and nothing else addressing title during life or at your passing, the trust isn’t the owner.  The trust WON’T become the automatic owner at your death.  Instead, the probate of will becomes necessary.  This too is an easy thing to address as part of proper estate planning, but sometimes I hear clients say “it’s just a little bit, no big deal.”  I assure you your beneficiaries will not agree.

Failing to tell the insurance company of ownership change. Be sure to tell your home insurance company about retitling to a trust. If not, the insurance company may deny your claim in an event because the actual property owner—your trust—wasn’t insured.  This is seldom is serious problem, but is easy to overlook.

Don’t make these trust mistakes. Work with an experienced estate planning attorney to ensure you are getting the most value you can out of your trust.

Reference: Yahoo Life (Jan. 10, 2022) “Why You Should Put Your House in a Living Trust”

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