Maybe you’ve seen those late-night infomercials with lawyers spitting out terms faster than an auctioneer: Irrevocable trusts. Living trusts. Revocable trusts. Insurance trusts. AB trusts. How the heck are you supposed to know what those are and whether or not you need one?
If this stuff is more confusing to you than the rules of cricket, then you’ve come to the right place. We’ll walk you through the ins and outs of irrevocable and revocable trusts (in plain English), so you know exactly what you’re getting into.
What Is a Revocable Trust?
A revocable trust is a trust that can be updated any time you want while you’re still alive (also called a revocable living trust). And while you’re still living, you keep control over all your stuff, even if you’ve put it into a living trust.
It’s just like a regular trust where you can put whatever valuables you want into it (land, money, heirlooms, etc.), except when you die, that revocable trust automatically becomes an irrevocable trust.
Benefits of a Revocable Trust
Why would you want to set up a living trust in the first place? Good question! Here are some benefits of a revocable trust:
1. Avoids probate. A revocable trust doesn’t go through probate court (the one that supervises how a deceased person’s assets are given out), and that’s a big load off your family. After all, who wants to take off work to sit in a courtroom—possibly several times?
A trust can save your family and loved ones time and money, and helps them receive your assets faster. Everybody wins. But it’s worth noting that a will or trust still has to be verified as valid, which means a judge will have to sign off on it at some point.
2. Protects your wishes. A revocable trust allows you to maintain control of your assets until you’re not mentally or physically able. If you have a family history of Alzheimer’s or early-onset dementia, this can provide much-needed peace of mind. If the worst should happen, you’ve got a back-up plan.
3. Allows for change. The biggest difference between a revocable and an irrevocable trust is the ability to change the trust any way you’d like.
A revocable trust gives you the flexibility of adding or removing heirs, giving more or less to a person, or altering other details. So if your brother decides he likes Auburn, you can make sure he doesn’t get your autographed Bear Bryant football.
Now here’s a big drawback of a revocable trust: It doesn’t protect you from lawsuits or creditors. Since you still maintain control of everything in your trust and have access to it, you can be sued for liability.
If somebody slips on the slick concrete next to your pool, they can sue you for the contents of your revocable trust—even if you posted a sign that says, “No Running!”
What Is an Irrevocable Trust?
An irrevocable trust is exactly like a revocable trust, except you can’t change an irrevocable trust. Once you sign on that dotted line, it’s forever. You can’t take it back or say you changed your mind.
Which means you can’t change who gets your grandma’s antique ring or decide to sell the ring for cash. It technically doesn’t belong to you anymore. It belongs to the trust.
Benefits of an Irrevocable Trust
Since irrevocable trusts are more permanent than a tattoo, you need to make sure the benefits outweigh the drawbacks for you. Here are a few:
1. Provides protection from lawsuits. If you have an irrevocable trust for all your assets, then the trust actually owns that stuff. That means if you are sued for somebody slipping on your pool deck, they aren’t going to be able to take whatever you placed in your trust. But anything not in that irrevocable trust is fair game.
2. Reduces estate tax. Since you’ve given up ownership of anything listed in an irrevocable trust, that property can't be taxed when you die. It’s technically owned by the trust. And that’s a good thing, since the highest estate tax rate is a whopping 40 percent.(1) Holy highway robbery, Batman!
3. Grants access to government programs. To be eligible for some programs, senior adults and people with disabilities have strict rules about income levels. An irrevocable trust can lower your taxable income so you (or a family member) can stay in the program.
Here’s the downside of an irrevocable trust: Since you don’t technically own what you put in it, you have to go through a legal process to change anything. So if you get inspired while watching HGTV, you can’t renovate the home you have in your trust without getting a thumbs-up from the person in charge of your trust.
Types of Irrevocable Trusts
If trying to understand trusts wasn’t enough to make your head explode, getting a grip on the specific types of irrevocable trusts just might. There are dozens of them! But we’ve broken down the three that most people hear about:
Life insurance trust: In this trust, the owner of a life insurance policy puts the policy in an irrevocable trust. Then, when the person dies, the insurance benefit is paid to the trust, so it’s not included in the estate for tax purposes. And the trust still follows your wishes as to who gets the money.
AB Trust: This irrevocable trust is often used with high-income spouses to avoid estate taxes. When the first spouse dies, the trust splits into two parts, A and B. Hence the name.
The money in part A of the trust stays in the trust. The money in part B goes to the surviving spouse. Once the surviving spouse dies, all of the money (part A and part B) is distributed according to the couple’s wishes.
Charitable trusts: Like the name sounds, these trusts are set up to donate all or part of your estate to a charity. There are two types: One type pays your heirs first and then gives the balance to a charity. The other type pays the charity first and then gives the balance to your heirs.
Okay, we get it. All the types and terms and subcategories are more confusing than the Titanic’s blueprint. Just remember this: If you’re unsure, get outside help.
Revocable vs. Irrevocable Trust: Which Is Best for You?
If you’ve noticed, a lot of trusts are created to avoid hefty estate taxes. We’re talking millions of dollars at stake. So unless you have a humongous estate like some of the everyday millionaires we’ve talked to, you don’t need to worry about a trust. An ordinary will is all you’ll need.
Instead of paying huge costs to have a trust drawn up, work with a company that can help you create a will. You can choose the specific kind of will you need and plug in your information, and you’re done. No muss, no fuss. And no migraine from trying to figure it all out!