Trusts are an important component to every good estate plan. There are several types of trusts you can choose from. Knowing which type of trust you need is also important. It is often suggested that, as your financial situation or other aspects of your life change, you should review the terms of your trust and make changes as necessary. In order to do that, you must have a revocable trust. The flexibility of revocable trusts is one of their most important benefits.
How do I know it’s a Revocable Trust?
All trusts, regardless of their purpose, are considered either revocable or irrevocable. Revocable trusts allow the person creating the trust (the grantor) to modify its terms as needed. A revocable trust can also be revoked entirely at any time while the grantor is still living. After the grantor’s death, however, the trust will become irrevocable. Since revocable trusts can be changed when your aspects of your life change, or when you change your mind about something, this type of trust is quite beneficial.
How an irrevocable trust is different
Irrevocable trusts are very different because their terms cannot be changed once the trust has been created and executed. Nevertheless, there are still some great benefits to using this particular type of trust. For example, assets that are included in an irrevocable trust are essentially protected from estate taxes, probate court, and your creditors. So, while you must lose control of your property when you transfer it to an irrevocable trust, you gain favorable tax consequences and other protections.
Asset protection through an irrevocable trust
Asset protection is only possible through an irrevocable trust. Why? Because, unlike a revocable trust, the property you transfer to an irrevocable trust becomes the property of the trustee. So, it is no longer considered your property. Essentially, that property can no longer be subject to your creditors or other legal judgments because it does not belong to you. However, with a revocable trust, because you still retain the ability to amend the terms of the trust, you technically have the authority to transfer the assets back to your control. That gives your creditor’s a possible claim to those assets.
Making amendments and restatements to revocable trusts
There are basically two ways to modify a revocable trust: either through an amendment or restatement. Revoking the trust entirely is another option, but it is often more complicated because the property has already been transferred. You will need to transfer the property again to the new trust. Regardless of which method you choose to make changes to your trust, it is critical that you understand the state laws that govern your particular trust. That is the only way to ensure that your amendment or restatement will be valid.
When is an amendment a good idea?
Depending on the circumstances, an amendment may be the best option. For instance, when you get married or have a new baby, or when you have a significant change in your trust property. In those situations, an amendment will likely be sufficient. If your beneficiaries change because someone has passed away or you change your mind about who you want to inherit a certain piece of property, then an amendment is a good choice.
When a restatement may be the better choice
While including amendments to an existing trust will often be the easiest way to modify your trust, amendments can get a little confusing. One way to avoid the potential confusion is to create a restatement of an existing trust, without revoking the trust entirely. A restatement allows you to include the required changes in the terms of the trust while maintaining the original date of the trust. That means, the trust property that was already transferred to the trust will not need to be transferred again. With a restatement, the new trust can include a declaration that it is a restatement of the original trust. The trust terms should also indicate that the original terms remain unchanged, with the exception of a few specific terms that have been added.
How to make changes to shared trusts
Shared trusts between spouses are actually very common. Either spouse has the authority to revoke the trust or make changes to its terms, as long as both spouses agree to the changes in writing. However, if one spouse passes away, the surviving spouse will be free to amend the terms of the trust, but only the terms that pertain to his or her property. On the other hand, no changes can be made to the terms relating to the deceased spouse’s trust property.
If you have questions regarding revocable trusts, or any other estate planning matters, contact Gaughan & Connealy for a consultation either online or by calling us at (913) 262-2000.