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Revocable or Irrevocable?

  • By: Douglas G. Goldberg
  • Published: June 4, 2020

What do you suppose are the top three questions asked of me as an estate planner? Take a minute, think about what you wanted to know, above all else, when you created your plan. Was it, “Should I do a QTIP trust for my spouse if I’m the first to die?” Or, “How do I protect the inheritance I leave for my kids from a car wreck, a lawsuit or a failed marriage?” Or perhaps, “How can I minimize the tax bill on my death, as well as on my spouse’s death?” Ummm… probably not.

Let’s do this David Letterman style. The number three question I get asked is “What’s the difference between a revocable trust and an irrevocable trust?” We’ll come back to this one. Number two on the list is “What’s better, a Will or a Living Trust?” Good question. And as you know, it depends on what you are trying to accomplish. But the all-time, number one question on the list is… drum roll here… “What’s all this gonna cost?” Anticlimactic I know, as it is the most obvious. The answer is the same one the car salesman tells you when you ask how much a car is. “It depends.” The price of a car or a home or an estate plan, pretty much anything, depends a great deal on what your goals and expectations are of the thing you want to buy. If you want to drive up Pikes Peak to go camping on the back side of the purple mountain, chances are you would be better served with a four wheel drive vehicle than a Cadillac Eldorado. The Caddy is a nice car but the four wheel drive is the better tool to get you there safely. It’s the same with an estate plan. Wills, trusts, powers of attorney, living wills, property agreements, LLCs and IRA trusts are all excellent tools when each one is used as it was intended. And if they accomplish your ultimate planning goals.

As an aside, I find it interesting, that the “What’s all this gonna cost” question isn’t even in the top 40 questions you ask your doctor when you need a hip replacement. We could discuss for many hours why that actually should be a top five question, but perhaps another time. For now, I want to come back to the third most asked question in our practice, “What’s the difference between a revocable trust and an irrevocable trust?” This is an important question and the folks that ask it generally have done a bit of internet research or have talked to someone they believe to be “in the know” on such matters. Here’s the short answer. The difference between a revocable trust and an irrevocable trust is in the name. Revocable trusts are changeable, amendable and, well, revocable. Irrevocable trusts are not – at least not by you. They are, more or less, permanent.

The ability to change the terms of a trust is an important matter when discussing protection of the assets in the trust. Another in the top ten questions I get asked is whether the assets placed in a revocable trust are protected from lawsuits or creditors or a divorcing spouse. Short answer – they are not. Assets in a revocable living trust are vulnerable to lifetime problems like lawsuits, divorces, and bad spending habits. Even the IRS disregards the revocable trust for tax purposes. A revocable living trust is an estate planning tool, not an asset protection tool.

Contrast the revocable trust with the irrevocable, unchangeable by you, trust. Once transferred into the trust, the assets are protected from creditors, lawsuits, some taxes and a divorcing spouse. Of course, “timing is everything” as they say, and the asset protection features of this type of trust are subject to the fraudulent conveyance laws and a host of other laws but suffice it to say this is an excellent strategy when your goals include a “bulletproof” level of asset protection.

Most strategies in the estate planning world involve tradeoffs. In this context, the tradeoff is protection of the assets versus control of the assets. The more protection you desire, the less control you can have over those assets and vice versa. More control results in less protection.

Some strategies are permanent. Like taxes, tattoos, amputations and the death of your beloved on New Year’s Day. Others are adjustable and can be changed as often as you desire. Like your hairstyle, your underwear and your religious or political affiliation. Which documents and strategies are best for you depends 100% on your planning goals. That’s why the question of “What’s all this gonna cost?” although the top question on everyone’s mind, simply cannot be answered in the first ten minutes of the “What’s better, a Will or a Living Trust?” conversation.

Douglas G. Goldberg, Esq.