Revocable Trust vs. Irrevocable Trust…Which One Do I Need?

A movie that I really enjoyed recently is “Knives Out,” which is about a detective who is hired to investigate the death of Harlan Thrombey, the patriarch of a wealthy but dysfunctional family who made his fortune by writing mystery novels. Upon Harlan’s death, his attorney is called in to read the terms of his will which, shockingly to his children, leaves everything to Harlan’s nurse Marta. Movies like “Knives Out” perpetuate the notion that upon a person’s death, the family must gather for a “reading of the will” to discover who will inherit the deceased family member’s worldly possessions.

Contrary to this dramatic movie script depiction, most estates are administered without arranging a family gathering for a “reading of the will.” Additionally, if the decedent had a trust, it is the trust, and not the will, which governs how the decedent’s assets will be distributed after his or her death. Often, clients come into our office for an estate planning consultation and initially say, “I need a will.” However, after we discuss the differences between a will and a trust, many clients opt to prepare a trust instead. 

While both a will and a trust are documents that can direct the distribution of assets after death, one difference between a will and a trust is the issue of privacy. Wills are filed with the county after a person’s death and become public record. Accordingly, anyone can access a copy of the will and see your personal data, such as your assets and beneficiaries. Trusts, on the other hand, are private documents. The terms of a trust are seen only by the creator of the trust (the grantor), the trustee (who will administer the trust), and the beneficiaries of the trust. Another disadvantage of a will is that in many cases a will is subject to probate, a court-supervised proceeding that is time-consuming and costly. Estate assets cannot be distributed until probate is complete, which typically takes at least twelve months. On the other hand, if a person creates a trust and properly funds it, the probate process can be completely avoided, making the administration of the person’s estate after death quick and efficient. There are many other benefits of a trust, including the following: a successor trustee can manage the trust assets for the grantor if he or she becomes incapacitated, estate taxes can be avoided through proper trust drafting, and trust assets can be prudently managed for certain beneficiaries, such as younger children, beneficiaries with spending or addiction issues, or beneficiaries with special needs (who may be disqualified from receiving government benefits if they inherit assets outright).

Once a client decides that a trust, rather than a will, better fits their estate planning goals, the next question usually asked by the client is “Do I need a revocable trust or an irrevocable trust?” A revocable trust, also called a living trust, is used to manage the assets of someone while that person is living, as well as to distribute the person’s assets after death. The grantor of a revocable trust is the lifetime beneficiary and initial trustee of the trust. As such, the grantor retains complete control of the assets titled in the name of the revocable trust. Assets can be added to or removed from the trust during the grantor’s lifetime, and the grantor can amend or revoke the revocable trust at any time, so long as he/she has mental capacity. Upon the grantor’s death, the trust assets are distributed privately and efficiently, without the need for a probate proceeding or court involvement. 

For most clients, a revocable trust, rather than an irrevocable trust, is the appropriate document for their estate planning goals and needs because of the ability to amend or revoke the trust and to retain ownership and control of assets transferred to the trust. An irrevocable trust, as the name implies, is generally not amendable or revocable (without permission of all of the trust beneficiaries or by court order). Accordingly, the grantor of an irrevocable trust cannot simply change the terms of the irrevocable trust if his or her financial circumstances or family relationships change after the creation of the irrevocable trust. Additionally, the grantor of an irrevocable trust loses control and ownership of any asset transferred to an irrevocable trust. 

Although an irrevocable trust is more restrictive than a revocable trust, there are a variety of reasons that a client may choose to prepare an irrevocable trust. One reason for preparing an irrevocable trust, which may have benefitted the wealthy mystery novel writer Harlan Thrombey in “Knives Out”, is to minimize estate taxes. The Illinois estate tax exemption is currently $4.0 million per person, and the federal estate tax exemption is currently $12.92 million per person. While the value of most estates falls below the current federal estate tax exemption, it is not uncommon for Illinois estates to be subject to Illinois estate tax given that all of a decedent’s assets, including the death benefits from life insurance policies, are included in the value of a decedent’s estate for tax purposes. It should also be noted that the federal estate tax exemption is set to “sunset” (i.e., revert back) to $5.0 million in January of 2026 unless Congress acts to amend this law prior to that date. After preparing an irrevocable trust, a grantor can move assets out of his or her taxable estate by gifting them to an irrevocable trust during his or her lifetime for the benefit of select beneficiaries. Because the grantor surrenders ownership of the assets when he or she transfers them to an irrevocable trust, the assets are not counted as part of the grantor’s estate for estate tax purposes upon his or her death. The additional benefit of transferring the asset to an irrevocable trust, rather than gifting the asset outright, is that the grantor can place conditions on distributions, such as allowing children to receive the assets only when they attain certain ages.

Another reason a grantor may choose to prepare an irrevocable trust is to protect assets from creditors or legal action. Once an asset is transferred to an irrevocable trust, it is owned by the trust, and not the grantor. Accordingly, the asset cannot be reached by creditors of, or legal claims against, the grantor. This can be especially beneficial for people who work in professions that are frequently subject to lawsuits (such as doctors). Additionally, some people choose to transfer assets to an irrevocable trust in order to qualify for certain government benefit programs (such as Medicaid or Social Security Income). Transferring an asset to an irrevocable trust removes the value of the asset from the person’s countable assets, thereby helping secure government benefits and/or preventing disqualification of eligibility for those benefits. 

To learn more about preparing a trust that fits your unique estate planning goals and wishes, as well as other essential estate planning documents, please contact Lavelle Law estate planning attorney Jackie Luthringshausen at jluthringshausen@lavellelaw.com or (847) 705-7555.