Revocable Trusts are familiar to anyone who has considered estate planning. Basically, the Settlor (person creating the Trust) retains complete control over the assets in the trust, can withdraw the principal for any reason, can change the beneficiaries, and can change the successor Trustees.

The problem with a Revocable Trust is that whatever you can reach, so can your creditors. Assets within a Revocable Trust may be also counted when applying for Medicaid or VA Benefits.

An Irrevocable Trust can be designed so that it provides the Settlor with almost all of the flexibility of a Revocable Trust. In other words, Irrevocable Trusts can be changed. The Settlor can change the beneficiaries and when (or if) the beneficiaries receive property.  The Settlor can also change the successor Trustees.

While a Revocable Trust permits you to maintain full control (as Trustee) and have access to all your assets (as beneficiary), an Irrevocable Trust, once created, may prohibit your right to control the trust (as Trustee) or have access to your assets, but you get to decide to what extent.

Examples:

  • Son marries gold digger?  Change the Trust to limit his access after your death?
  • Daughter getting married, liquidate assets to pay for wedding.
  • Want to retire to the mountains?  Sell property and purchase new one.

Flexible arrowIt is a common misconception that irrevocable trusts, once created, cannot be changed. While that is true of many irrevocable trusts created to avoid taxes (tax reduction or avoidance trusts), it is not true of all irrevocable trusts. An irrevocable trust is a trust you create for the benefit of yourself or others and once created, you, as Settlor, must give up your right to something. So while you cannot liquidate the principal for a vacation, you can spend the same money on a child’s tuition.

Debtor/Creditor law provides that whatever you can get, your creditors can get. You can have known creditors (i.e., bank/credit card debt) or unknown potential creditors (unforeseen lawsuits, nursing home, and divorce). A typical income-only irrevocable trust permits you to receive the income on your assets, but you must give up your right to liquidate your principal. In some irrevocable trusts, you can retain the right to change who gets your assets during your life and after your death, and maintain 100% control of your assets until your mental disability or death (asset protection trusts).

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