Trusts are a key element of every good estate plan. Knowing which type of trust you should have is also key, and the most popular type of trust is a Revocable Trust (also commonly called a Living Trust). It is often necessary to review and revise your trust to address changes in your finances, family, and other aspects of your life, and the need to change the terms of your trust can arise more than once throughout your lifetime. For clients who create revocable trusts, it can be easily amended or revoked whenever necessary, and the flexibility of a revocable trust is one of its greatest benefits.
Defining a Revocable Trust
There are several different types of trusts, but they are all basically categorized as either revocable or irrevocable. There is a very important difference between a revocable and irrevocable trust. A revocable trust permits the grantor(s) (the person(s) creating the trust) to make changes to the terms of the trust. You can also revoke the trust altogether, at any time, during your lifetime. Once you pass away, the trust usually becomes irrevocable. Because revocable trusts can be modified when your life circumstances or intentions change, they are very flexible estate planning tools. With a revocable trust, the trustee takes over only upon your death or incapacity.
How is an Irrevocable Trust Different?
An irrevocable trust is different because, by definition, it cannot be modified once it has been executed. Despite the fact that irrevocable trusts cannot be modified, there are a great many benefits to this type of trust. Because the trust is irrevocable, the assets are basically out of the reach of estate taxes, probate court, and in some cases, your creditors. Though you may lose control of your assets, you gain favorable tax consequences and other protections.
How Irrevocable Trusts Can Protect Your Assets
In order to enjoy true asset protection, your trust must be irrevocable. That is because, after your money has been transferred to the trust, it is no longer considered your money. In other words, it is no longer subject to your creditors. Note, however, that there are certain exceptions for fraudulent transfers, and there are certain look-back periods that might make those assets available to creditors. Contrarily, with a revocable trust, if you maintain the right to amend the trust and have the authority to transfer the assets back to your control, then a creditor can still reach those assets.
Amendments and Restatements to Revocable Trusts
There are generally two ways to modify a revocable trust. It can either be amended or restated. Revoking a trust is usually more complicated because the property included in the trust has already been transferred and must be transferred again. This adds complexity, time, and cost when changing a revocable trust and is not generally recommended. It is important to understand the state laws that govern your trust, and a qualified attorney should be able to review your trust documents to help determine if anything needs to be updated. That way, you can ensure your amendment or restatement will be valid.
When Should You Amend Your Trust?
There are some situations where an amendment is sufficient to account for changes in your life. For example, if you get married or have a baby, or when you have a substantial increase in your trust property, then an amendment could do the job to make sure your goals are met. If your beneficiaries change, either because someone has died, or you changed your mind about who you want to inherit a particular piece of property, then an amendment can update these parts of your trust without affecting the rest of the documents. Additionally, if there have been minor changes in the law that would not otherwise affect the majority of your trust, an amendment can specifically identify and update those terms of your trust to reflect the most current law and legal practices.
A Restatement May Be the Better Choice
Adding amendments to an existing trust can often be the simplest way to modify your trust, but amendments can become confusing. When amending a trust, an attorney must first look to the original trust document, and every subsequent amendment, to make sure the proper language is in your trust agreement. If you have made multiple amendments to your trust, it can be a nightmare to track each change through each separate legal document. Other times, the changes needed will require amending large portions of your trust, which adds times, cost, and complexity. One solution is to restate an existing trust without revoking the trust entirely; in other words, start over from scratch in writing the trust agreement. That way, you can simply include the necessary changes, while keeping the original date of the trust. Then, the trust property that is already held in the trust will not need to be transferred again.
Are Shared Trusts Handled Differently?
Creating a shared trust with a spouse is quite common. With a shared trust, either you or your spouse has the authority to revoke the trust as long as you both are alive. If you decide to amend or restate the terms of the trust, both you and your spouse must agree to those changes in writing. Shared trusts can be drafted a number of different ways, so that after the death of one spouse the trust can either limit the surviving spouse’s ability to amend the trust, or it can provide complete flexibility allowing the surviving spouse to amend the entire trust.
If you have questions regarding revocable trusts, or any other estate planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.
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