Revocable Versus Irrevocable Trust
As a legal structure, a trust removes assets from the hands of their owner and places those assets into the hands of another party. Sometimes this transfer can be revoked or modified later, but the law can make either process difficult. Detailed rules about revocability of trusts are a matter of state law; if you have questions about a specific trust structure, you should take those questions to an attorney.
Other People Are Reading
-
Trusts in General
-
When an individual, known as the settlor, wants to make sure that his assets can work for another's benefit, he may choose to set up a trust. To create a trust, the settlor legally transfers his property to the legal ownership of another, the trustee. The trust document typically stipulates that the trustee must hold the property and make it productive on behalf of someone else. The party who enjoys the benefit of the trust and its assets is the beneficiary.
Revocable Trusts
-
The majority of jurisdictions consider a trust irrevocable as the default rule. In such jurisdictions, in order to make the trust revocable, the settlor must put some clear language in the trust document that shows that he intends it to be revocable. Settlors can change or revoke (meaning, terminate) the trust at any time during their lifetimes, without any other party's permission. When the settlor dies, however, the trust becomes extremely difficult to change.
-
Revocable Trust Uses
-
Many settlors use a revocable trust for estate planning purposes. Unlike a will, the revocable trust becomes legally operative during the settlor's lifetime; with the settlor available, there's usually no need for a court to ascertain the validity of the trust document. Additionally, a revocable trust may disperse assets after the settlor's death without needing to go through probate. Trusts typically allow beneficiaries to receive assets much more quickly than a will. Settlors may also use revocable trusts to plan for unforeseen mental incapacity during their lives.
Irrevocable Trusts
-
Irrevocable trusts are not absolutely irrevocable during the settlor's life; the term "irrevocable" really means that the settlor cannot revoke the trust himself. Once the settlor declares the trust irrevocable, the beneficiaries have an interest in the trust. Therefore, if a settlor wishes to change or revoke an irrevocable trust, absent extenuating circumstances, most states require each beneficiary of the trust to give permission for the change. Once the settlor dies, a court may still revoke the trust, but if the trust document stipulates the settlor's desire that the trust continue indefinitely, most courts will not revoke it.
Irrevocable Trust Uses
-
Settlors can also use irrevocable trusts for estate planning, similar to revocable trusts, but some parties prefer to retain the ability to make changes on their own before their deaths. Irrevocable trusts can also accomplish asset protection; because the trustee holds legal title, parties with a claim may not be able to go through the trust and grab the assets. Depending on the structure of the trust, the settlor may use it to place his assets beyond the reach of creditors, or he may use it to supply beneficiaries with the necessities of life while keeping these "necessary" assets from the beneficiaries' creditors.
-
References
- Photo Credit Ryan McVay/Photodisc/Getty Images
