Step One in Estate Planning: Deciding whether to establish a Revocable or Irrevocable Trust

According to recent studies, nearly 70% of Americans not have any estate plans in place. In our experience, there are several reasons for this. Some clients think they are too young to worry about estate planning. Some clients don’t like to think about death. Some clients cant agree on who should serve as guardians for their children or trustee for their assets.

The fact is, whether you are a 40-something year old with a young family, a 30-something year old purchasing your first home, or any other high net worth individual – setting up a trust is essential to make sure your assets are distributed in the way you want in case of an accident.

Estate planning includes establishing trusts and wills, titling assets, naming beneficiaries, designating power of attorney, etc. For today’s discussion we are going to focus on one aspect of estate planning, the use of revocable vs. irrevocable trusts.

In California where probate is expensive and time consuming, anyone with assets over $185,000 should serious consider establishing a revocable living trust.

A trust is a legal document which ensures all assets (property, stocks, etc.) under your possession are accounted for and designated for a beneficiary. Beneficiaries can be siblings, children, grandchildren, friends, or any other person you name.

When working with an attorney to establish one’s trust, you will have to consider both revocable and irrevocable trusts. The main difference between revocable and irrevocable trusts is the ability to easily make changes once the trust is established.

As the name implies, revocable trusts have wiggle room, whereas irrevocable trusts are more set in stone. While it is possible to change an irrevocable trust, it requires jumping through a number of hoops and may even require going to court. 

Let’s say you create a revocable trust, then need to make updates to it. What can you change about a trust once it’s been created? Essentially the entire document – you can update what assets you have and who they will be distributed to. Simple changes can be made with what are called ‘amendments’ whereas more complex changes can be made by amending and restating the document. The nice part about that is, while the entire trust may change, the name and tax ID number remain the same so assets that are titled in the trust don’t need to be retitled.  

In some situations, an irrevocable trust may be used, often in conjunction with a revocable living trust. Here is an example, Bob marries Sally and Sally is Bob’s 2nd wife. Bob has kids from his 1st marriage. Bob creates an estate plan that says at his death, $5M of his $10M estate goes to Sally via his revocable living trust and the other $5M goes to Bob’s irrevocable trust. That irrevocable trust is earmarked for Bob’s kids and allows Bob to take care of his wife and his kids, without them ever having to let money become an issue.

Irrevocable trusts aren’t impossible to change, but they usually require the approval of all beneficiaries and a court’s approval.

Estate planning is an essential part of the financial planning process. You’ve worked hard to get to where you are, and it’s important to ensure decisions made after you pass are in the best interest of you and your loved ones.

Part of the decision making starts by determining whether a revocable or irrevocable trust is your best option, weighing (among other things) their tax implications and their ability to be changed.  

Afterwards, deciding on ways to lessen estate tax is important, especially for high-net-worth individuals hoping to ensure their legacies can be enjoyed by their loved ones.

There is no shortage of strategy to implement throughout your estate planning process. As always, we recommend working with a professional who understands both tax strategies and wealth management.