Creating a revocable trust is a cost-effective and often straightforward estate planning strategy with a range of benefits, including safeguarding assets and avoiding probate. However, many people do not realize that a revocable trust can become irrevocable. This article explores situations when a revocable trust become irrevocable, along with other critical things you should know about this type of trust.
What Is a Revocable Trust?
A trust is a fiduciary arrangement where the management of one’s assets is done by a third-party entity or Trustee on behalf of an heir or beneficiary. Trusts usually avoid probate, making them a popular way to distribute assets after a person’s death. The beneficiaries will receive their assets more quickly than they would with bequests transferred through a will.
People can choose from two primary types of trusts: a revocable trust or an irrevocable trust. In a revocable trust, the grantor has complete control over their assets during their lifetime and can modify or eliminate the trust at will. The grantor can revoke a trust by destroying the trust documents and notifying the Trustee and other parties that may have copies of the documents. In the case of an irrevocable trust, the grantor cannot unilaterally change the trust.
Components of a Revocable Trust
A revocable trust has three main components:
- The grantor
- The Trustees
- The beneficiaries
The grantor refers to the creator of the trust, entrusting the assets within the trust to the Trustee or Trustees. The beneficiaries benefit from the trust property and income. If the grantor also acts as the Trustee, the grantor needs to appoint at least one successor Trustee to take over if he passes on.
The Trustee’s primary job includes managing or administering the assets within the trust according to the grantor’s wish and all applicable laws. The Trustee may need to find investments that will help increase the assets’ value. The Trustee also holds the responsibility of maintaining proper records and paying all applicable taxes.
The grantor is usually also the sole beneficiary of the trust’s proceeds during their lifetime. The specified children, spouse, or other individuals and entities become beneficiaries upon the grantor’s death. The trust becomes irrevocable when the grantor or grantors die, and we’ll discuss this in more detail later in the article.
What Are the Benefits of a Revocable Trust?
If administered correctly, revocable trusts have many advantages over just using a will. They make an excellent tool for incapacity planning and help avoid costly and stressful probate administration. Let’s take a look into the advantages of a revocable trust:
Revocable Trusts Are Flexible
The major advantage of a revocable trust lies with your ability to freely move assets in and out of the trust, depending on your current situation. You can also add or remove beneficiaries at will by amending your trust.
If you use a funded revocable trust, you may be able to name unrelated, out-of-state persons and out-of-state trust companies to act as your trust’s main administrator upon your death. In many jurisdictions, you may not enjoy this kind of flexibility without a trust.
Revocable Trusts Protect Your Privacy
Unlike a will, a revocable trust becomes a private document between the parties involved and is not a public record. Therefore, no one can search public records to find more information about your assets’ distribution.
Everything in a will becomes public, and the record remains on file with the county. However, it’s worth noting that the privacy of a revocable trust only applies to the assets transferred into the trust when the grantor was alive.
Revocable Trusts Avoid Probate
Probate includes the legal processes necessary to determine the validity of a will. Probate can be expensive and time-consuming for the beneficiaries. It may take considerable time to file paperwork before beneficiaries can access their assets.
It can become even more frustrating if a potential beneficiary contests the will. For these reasons, the avoidance of probate is one of the foremost advantages of a revocable trust. Avoiding probate may translate to a faster distribution of assets to beneficiaries, shortening the timeframe from months or years to mere weeks without additional costs to the heirs.
The avoidance of probate can be especially beneficial if you own property in another state. The property will pass to your heirs and not be subject to the state’s probate laws. At times, the administrator may discover some assets after your death, and they must undergo probate. In that case, we advise that you prepare a will alongside the revocable trust to capture these assets and direct them to pour over into the trust for management and distribution.
Revocable Trust Assets Are Accessible at Death
Immediately after the grantor’s death, the administrators can access the assets in a revocable trust to raise funds to pay debts, estate taxes, and various administrative expenses. They don’t have to wait for the issuance of preliminary letters or a probate decree. If you funded the trust before your passing, the assets in the trust remain in the Trustee’s name before and after your passing and become immediately available for liquidation if needed.
Revocable Trusts Allow for Uninterrupted Investment Management
Another great advantage of creating a revocable trust is that it ensures uninterrupted management of your investments if you become incapacitated or die. If you are mentally or physically incapable of caring for yourself, a state court may appoint a guardian to handle your financial affairs if you have not already done so through your estate plan.
If you had previously transferred the assets into the trust’s name, there would be no need to worry about these transfers upon your death. Likewise, depending on your estate’s financial needs and investment goals, there could be no need to create a new investment strategy, as your estate plan could already instruct on investments.
Revocable Trusts Provide Peace of Mind
A well-prepared revocable trust spells out how to handle all your assets. It ensures you don’t deprive anyone of inheritance you wish for them to receive, helps you care for a loved one with special needs into the future, and protects your assets from certain individuals.
With all these advantages, you can rest easy knowing that the appointed parties will handle your assets according to your wishes. Furthermore, having a trust in place also gives your loved ones some peace of mind knowing that you have thought about these issues before.
When a Revocable Trust Becomes Irrevocable
Many situations can lead to a revocable trust becoming irrevocable. However, the common situations include the incapacitation or the death of the grantor.
Incapacitation of the Grantor
A revocable trust can become irrevocable when the trust’s creator becomes incapacitated and unable to make decisions for themself. The courts will need to appoint a successor Trustee to manage or administer the grantor’s estate when that happens, unless the trust already provides for a successor Trustee.
The status change is essential for ensuring that no one can alter the trust while the incapacitated person still lives. It also protects the incapacitated person from having the trust modified or revoked during their incapacitation without their consent.
Death of the Grantor
A revocable trust can also become irrevocable once the creator of the trust, the grantor, dies. Subsequently, no one can change or revoke the trust. In some cases, people decide to set up an irrevocable trust while still living depending on their health and care needs.
That means that the grantor won’t enjoy the freedom and flexibility of modifying the trust whenever they want. However, they will enjoy better tax protections. For example, individuals with vast estates often prefer setting up irrevocable trusts before their death to minimize or avoid various estate taxes.
In joint revocable trusts, the trust generally cannot become irrevocable until both grantors die. However, as with most legal provisions, you have ways to bypass this rule. Since the instruments that establish the trust govern the terms of the trust, those who create the trust can define the operating ground rules, provided they don’t contravene the law.
If you set up a revocable trust as a couple, you may consider inserting a phrase into the trust that renders the trust irrevocable at the death of one partner. For example, if one spouse suffers from a disease that would diminish their mental capacity in the future, you might add a phrase that would render the trust irrevocable upon the demise of the healthy spouse.
That means an appointed successor Trustee would take over the estate management for the sick spouse if they can no longer effectively manage the trust.
Your Go-To Source for Estate Planning and Trust Advice
If you want to set up a revocable living trust or find out if it is right for you, Weiner Law has you covered. We offer a wide range of estate planning strategies to meet your unique needs, including setting up revocable trusts.
Contact us today at 858-252-4768 to schedule a complimentary, no-obligation consultation with one of our San Diego estate planning attorneys to learn more about a revocable living trust and if it suits your specific needs.