We’ve dedicated a lot of time to explaining the mechanics of revocable living trusts and how they fit into your estate plan alongside a last will and testament, living will, and medical directives. There’s one feature that we haven’t talked about very much, and that is the option to have your revocable living trust change into an irrevocable trust upon your passing.
The Distinction Between Revocable and Irrevocable Trusts
There are many purposes for creating an irrevocable trust, but the primary purpose is asset protection. Trusts allow people to separate ownership and control of assets from beneficial use of the same assets. That’s important because ownership of assets is what counts when it comes to lawsuits and other liabilities. For example, if a person who is the beneficiary of an irrevocable trust is sued and loses the suit, the assets held in the trust are protected—they cannot be obtained by the plaintiff—assuming the irrevocable trust was set up properly.
Revocable living trusts are, by their nature, not intended to shield assets from creditors or provide any measure of protection from lawsuits. That’s because the purpose of a revocable trust is to avoid probate court, which is where estates are typically settled if there is only a last will. Revocable trusts do not separate control from beneficial use. Rather, such trusts hold and technically own assets as opposed to the same assets being owned by an individual (and the individual’s estate upon death). So because control and beneficial use are not separated, creditors can access assets held in revocable trusts.
In short, irrevocable trusts provide very strong protection for assets. Revocable trusts do not.
Getting the Best of Both Worlds
Many people—many of our clients—are not concerned about personal liability. The reasons for that are numerous: Adequate insurance coverage, low-risk professions, and conservative lifestyles are among those reasons. Those same people, however, are often very concerned about the safety of their assets in the hands of their heirs, in the hands of loved ones who are either not astute at managing assets or who are possibly the targets of lawsuits.
In such cases, you can choose to have your revocable living trust turn into an irrevocable trust at the time of your death. This “triggering” can have a variety of effects. First, it will allow you to have your assets held in trust for a specified period of time following your death. The rules regarding how long the delivery of your assets can be delayed is an extremely complex area of law, which is why you probably need an attorney to help you.
The second effect is that even though income from your assets can be paid to your heirs after your death, the assets themselves—the “corpus” of the trust—will be protected from creditor claims, assuming your trust is initially drafted correctly. Finally, through the use of such a trust, your estate will likely be totally exempt from costly and potentially unpredictable probate proceedings. Of course the best benefit is that you will retain full control and use of your assets while you’re alive.
There are many very specific legal requirements that must be met in order to create the type of trust described above. If you think that a revocable living trust that becomes irrevocable would suit your planning needs, then contact our office today and we will work with you to craft a unique document that meets your specific requirements. Again, this is not the type of drafting that should be trusted to amateurs, because it is a complex area of law and requires a lot of precise drafting. We normally charge $750 for a Family Wealth Planning Session, but if you call our office today and mention this article by name, we’ll meet with you for free!