Revocable vs. Irrevocable Trusts
Updated: Feb 28, 2020
What is the difference between a revocable living trust and an irrevocable trust? This is a very common question. A revocable trust is simply one that can be revoked at any time. In this context “revoke” means not only to cancel the trust entirely but also to change it. This is confusing to non-legal types. At the beginning, most trusts are revocable to give the person making the trust flexibility in the future. The person who sets up the trust is called the “settlor” or “trustor” in legal language.
How do trusts get changed? Typically, a change to a trust comes about as a result of the trustor having second thoughts about the provisions of his or her trust, or who should receive the inheritance. Perhaps a beneficiary has died, or gotten into some legal difficulty or a nasty divorce. In this cases, and for any reason at all, the trustor can change the terms of a revocable trust. The most famous example of revocable trust in the news today is that of Donald Trump. After being elected, President Trump put all of his assets into a trust for his children to manage. The key feature of this trust was that it was revocable. It can be changed at any time by President Trump.
There are some “triggers” which make a trust become irrevocable (that is, unchangeable or set in stone). A typical trigger is the trustor’s incapacity. Oftentimes the trust will become irrevocable once the trustor is unable to manage his or her own financial affairs. For example, the trustor may have dementia or Alzheimer’s disease. Sometimes the trustor simply decides not to have that responsibility any more. Many elderly trustors will voluntarily resign as trustee and decide that their trust cannot be changed. Since elderly people can be vulnerable to financial abuse, this is often a good idea to consider.
Another trigger is the death of a spouse in a joint trust. For example, if husband and wife set up a trust and the husband dies, the trust may limit the surviving wife’s ability to alter the trust (change beneficiaries or other key provisions) at that point.
The critical importance of the irrevocable trust is that it becomes a taxable entity and legal requirements begin applying to the trustee of an irrevocable trust that were not there while the trust was revocable. After becoming a trustee, it is important to seek legal advice before administering the trust. Administrating a trust can can easily become a stressful situation and can result in disgruntled beneficiaries. Getting appropriate legal advice can greatly ease this tension and avoid unpleasant family disputes.