Why Most Families Use Revocable Instead of Irrevocable Living Trusts

Irrevocable Living Trust

In general, American middle-class families do not need to create irrevocable living trusts. Irrevocable living trusts are mainly used by the rich for reducing inheritance taxes on the estate they leave to their beneficiaries. To be clear, these are taxes that are not due until after death, and it’s a tax to the beneficiaries on the amount the beneficiaries receive. The reason these trusts are for the rich is that currently no estate tax is due unless the estate is worth more than $11.7 million. And, if a married couple, that exemption doubles to $23.4 million. Very few families (less than 1%) have estates valued this high. Therefore, most families do not have tax issues when passing an estate on to their beneficiaries and generally benefit from a common revocable living trust.

How does an Irrevocable Living Trust Work?

An irrevocable living trust is simply just some pieces of paper that state who the beneficiaries are after death of the owner. However, once the trust is created it becomes irrevocable, meaning its terms can never be changed. When an irrevocable living trust is created, a person (the grantor) removes control of assets from their personal estate and gives them to the irrevocable trust. The irrevocable living trust itself becomes the new owner of the granted assets. The trustee of the irrevocable trust manages the assets in the trust. The person that created the trust cannot be the trustee, and therefore has legally given up control of the assets. Since the person no longer owns those assets given to the trust, they will no longer count against the value of the person’s estate at death. The goal when creating an irrevocable living trust is to give enough money to the trust to reduce the value of a person’s individual estate under the exemption of $11.7 million (or again, $23.4 million for a married couple). There are many types of irrevocable trusts that can be created. An irrevocable life insurance trust can pay the premium of a life insurance policy. A charitable remainder trust is irrevocable and a charity is named as the final beneficiary.

Revocable Living Trusts Become Irrevocable At Death, And That’s A Good Thing

Revocable simply means “changeable”. A revocable living trust is completely flexible and can be changed by the owner as often as they wish at any time during their lifetime. For example, it’s your birthday and one of your beneficiaries doesn’t send you a birthday card – you can cut them out! Since it can be changed, a revocable living trust is the most common type of trust used by families to pass on an inheritance.

However, after death, the entire living trust converts and becomes irrevocable, and nobody can change it. And this is a really good thing for two reasons.  One, since it can’t be changed after death, you can have the comfort of knowing that what you want to have happen, who your beneficiaries are, how much they get and when, no one can change that.  The other reason is really important too.  Believe it or not and more often than you would think even with close loving families, when an inheritance comes many beneficiaries fight over the money. And it only takes one person to get the fight started, such as a disgruntled in-law. Well, since the trust becomes irrevocable immediately upon death guess what? There is nothing to fight over. It’s irrevocable and no one can change it. This is a great feature of a revocable living trust. When a person thinks of leaving an inheritance, they are usually feeling proud to leave their family a legacy in order for the family to prosper in the future. They definitely don’t think or imagine that by doing so could end up ruining the family where the beneficiaries fight over the money and in some instances end up never talking to each other again.  A revocable living trust converting to irrevocable after death protects a family’s future well-being and prevents fighting among beneficiaries.

Irrevocability Provides Comfort To Families With Children From Prior Marriages

It is common that people get married again. This can create issues when developing a plan to leave an inheritance to the children. It is not unusual for children of blended families to fight over an inheritance, especially after the death of the first spouse. One concern is that if the surviving spouse remarries someone else with children, will that new spouse (or the children of the new spouse) attempt to cut out the inheritance of the deceased spouse’s children? For this reason and many more, blended families need a way to protect the inheritance for children of prior marriages. The use of a revocable living trust can provide this protection. Provisions can be added to the trust, that at the death of the first spouse, the amounts allotted for that deceased spouse’s children will become irrevocable within the trust. No one can make changes and cut those children out of their inheritance. The surviving spouse can access income generated from the assets during their remaining lifetime, but the inheritance to those children cannot be touched or changed in any manner. Experienced living trust attorneys are well suited to assist blended families in creating these important provisions.