Why Would You Choose an Irrevocable Trust Over a Revocable Trust?

In the estate planning realm, trusts are the utility players, suitable for accomplishing goals as diverse as protecting assets, managing incapacity, and avoiding probate. Among the many and varied types of trusts, two of the most common are revocable trusts and irrevocable trusts. As their names suggest, revocable trusts may be modified or terminated during their creator’s lifetime; irrevocable trusts, on the other hand, generally are set in stone once they are executed. So if revocable trusts are so much more flexible than irrevocable trusts, why would anyone ever choose the latter? It turns out that inflexibility has its benefits, as our Branson estate planning lawyers explain below. 

First, What’s a Revocable Trust? 

Revocable trusts, sometimes referred to as “living trusts,” are trusts that the creator can change at any point during their lifetime. At a high level, a revocable trust is an agreement among the settlor (i.e., the person who creates the trust), the trustee (i.e., the person who manages the trust), and the beneficiary (i.e., the person who receives the trust’s assets). In many cases, the settlor names themselves as trustee and retains the power to direct or control the terms of the trust and the assets within it. In addition to probate avoidance, the primary benefit of revocable trusts is that they can be changed when the settlor’s circumstances change, such as upon marriage, the birth of a child, or a financial windfall. But flexibility comes at a cost. Because the settlor/trustee retains control of the trust, the assets within it remain part of the settlor’s taxable estate, thereby offering little direct tax savings or asset protection. 

What’s an Irrevocable Trust? 

Irrevocable trusts are similar to revocable trusts in that they are agreements among the settlor, the trustee, and the beneficiary. The key difference is that irrevocable trusts generally cannot be modified or terminated by the settlor once executed. Only in limited circumstances may irrevocable trusts be modified, such as by the unanimous consent of the settlor and all beneficiaries, or by court order. Due to the implications of irrevocability, Missouri law presumes that all trusts are revocable unless explicitly made irrevocable. Speak to a Branson estate planning attorney for more information about how to make a trust irrevocable. 

Advantages of Irrevocable Trusts 

In most matters, flexibility is a perk in itself. So why would anyone ever choose an irrevocable trust, especially for something as important as their estate? After all, the only constant in life is change, and a settlor’s circumstances will change after executing a trust. While flexibility indeed comes with many benefits, inflexibility (at least with respect to trusts) also has its perks, namely: 

Asset Protection 

As we established, the assets within revocable trusts are considered part of the settlor’s personal estate because the settlor retains control over them. Not so with irrevocable trusts. Once assets are placed into an irrevocable trust, they are no longer considered part of the settlor’s personal estate because the settlor loses control over them, instead handing over control to the trustee. Since those assets are not part of the settlor’s estate, the settlor’s personal creditors cannot reach them. For more information about asset protection trusts, speak to a Branson estate planning attorney. 

Beneficiary Protection 

It’s not just settlors who irrevocable trusts protect from creditors; it can also be beneficiaries. Consider a scenario in which a settlor has several children to whom they wish to leave legacies, but some of said children are more financially responsible than others. No one would want their irresponsible child to assign their interest in a trust to a creditor or to make an unwise purchase. To address that concern, irrevocable trusts may include spendthrift provisions that protect beneficiaries’ interests from creditors until the trustee distributes them (with some exceptions). Such clauses also prevent beneficiaries from transferring their interests in the trusts, thereby providing at least some protection against poor financial decisions. 

Medicaid Planning

Long-term care is expensive, and because many individuals cannot afford the full cost on their own, they turn to Medicaid to help shoulder some of the burden. But Medicaid is a means-tested program, which can lead to situations in which an individual is too wealthy to qualify but not wealthy enough to pay the full cost of long-term care out of pocket. That’s where irrevocable trusts come into play. Because the assets in irrevocable trusts are not part of the settlor’s estate, they generally are not considered available resources for Medicaid eligibility purposes. Readers should be aware, however, that there are a few caveats to the use of irrevocable trusts for this purpose and that such trusts must be carefully drafted. That’s why you should speak to an experienced Branson estate planning attorney if you’re considering establishing a trust for Medicaid planning. 

Estate Tax Planning 

Assets placed into irrevocable trusts are removed from the settlor’s personal estate for federal estate tax purposes, thereby potentially reducing estate tax exposure if the estate exceeds the federal estate tax exemption thresholds. While Missouri does not impose its own estate tax, high-net-worth Missourians are nonetheless subject to the federal estate tax. 

So…Why Choose an Irrevocable Trust? 

Individual circumstances vary, but at a high level, irrevocable trusts are well-suited for those who: 

• Value asset protection over flexibility 
• Want to minimize their exposure to liability 
• Have estates that are subject to the federal estate tax
• Want to maintain eligibility for Medicaid 
• Need to protect their beneficiaries from themselves 

Contact a Branson Estate Planning Attorney to Discuss Whether an Irrevocable Trust Is Right for You

Irrevocable trusts offer many more benefits than revocable trusts, but they are not for everyone. In many cases, the flexibility revocable trusts offer outweighs their comparatively limited asset protections. The best way to determine which type of trust is best for you is to discuss your individual circumstances with an experienced attorney. To get started, please contact a Branson estate planning attorney at the LifeGen Law Group by calling 417-823-9898 or using our online contact form.