In Florida, the primary difference between a revocable trust and an irrevocable trust is that a revocable trust can be amended or revoked during the settlor’s lifetime, while an irrevocable trust cannot. In terms of asset protection, a revocable trust is only rarely used as part of an asset protection plan, while irrevocable trusts are useful in several protection contexts.
What Is a Trust?
A trust is a contract between a trustmaker (often called a grantor or settlor) and a trustee established for the benefit of named beneficiaries. A trustmaker transfers legal title of his property to a trustee who holds the title and property as a fiduciary for the benefit of named current and future beneficiaries.
Trusts are essential tools for estate planning. People anticipate conveying their assets to estate planning trusts, but they often do not understand how different types of trusts fit into the estate planning process. Trusts have many purposes, including avoiding probate, reducing estate taxation, or protecting assets from creditor risk. The type of trust and the terms of trust depend on the priority of various planning goals.
Revocable vs. Irrevocable Trust
Trusts are initially distinguished by whether they are revocable or irrevocable. A revocable trust conveys assets to a trust expressed by a written trust agreement that expressly reserves the trustmaker’s right to revoke the trust entirely or amend any part of the trust agreement for any reason during the trustmaker’s lifetime. Most estate planning trusts that direct the disposition of the trustmaker’s property upon death are revocable trusts. These estate planning trusts are called “living trusts” because the trustmaker retains complete control benefits of the trust while he is living.
An irrevocable trust is a trust whose trust agreement prohibits revocation or amendment. Transfers to irrevocable trusts are final conveyances, with some small exceptions. A trustmaker cannot change his mind about transfers he makes to an irrevocable trust.
Some trusts are designed to be irrevocable from the beginning; others start out revocable and later become irrevocable. An example of a trust that starts out irrevocable is a trust set up to make gifts to the trustmaker’s children during the trustmaker’s lifetime. Assets transferred to an irrevocable children’s trust are the children’s property. The trustee, as a fiduciary, must use the principal assets and trust income for the children’s benefit and not for the direct benefit of the trustmaker. Of course, using the trust money for the children’s education, for example, usually indirectly benefits the trustmaker.
Another example of a lifetime irrevocable trust in Florida is an “insurance trust.” There are tax benefits and asset protection benefits of owning life insurance in the name of an irrevocable trust. The death benefit of life insurance (the amount paid to family members upon the insured’s death) is part of the insured’s taxable estate, except when the life insurance is owned by an irrevocable trust. Death benefits paid to family members are vulnerable to their creditors upon receipt, but the death benefits are creditor-protected if the money is held inside a properly drafted irrevocable insurance trust.
When Does a Revocable Trust Become Irrevocable?
A revocable trust becomes irrevocable upon the death of all trustmakers. The trust is “locked” at death, and the trustmaker’s heirs (the future trust beneficiaries) cannot change the terms of such inherited trust, with very few exceptions. The trustmaker’s written notes, memorandum given to family members, or oral instructions given to family members during his lifetime will not change the revocable trust’s estate plan once it becomes irrevocable.
How to Close a Revocable Trust After Death
A revocable living contains written instructions for how the trustmaker desires to distribute his assets after death. The process of transferring assets, paying debts, and following the trustmaker’s instructions is referred to as “trust administration.” Trust administration is directed by the persons the trustmaker nominated to serve as his successor trustee.
Trust administration involves several tasks. For example, the family first must make sure it understands the trustmaker’s written instructions expressed in his trust agreement, and any disagreements regarding the trust instructions must be resolved. The successor trustee must find out if the trustmaker owed money or was subject to any legal claims. The successor trustee must use non-exempt trust assets to satisfy debts and settle claims. The trustmaker’s income tax liability for the year of death must be determined and paid. The successor trustee also must determine if the trustmaker’s taxable estate is subject to estate taxation.
Only after trust administration is substantially completed may the successor trustee distribute trust assets to the trustmaker’s heirs according to the trustmaker’s written instructions. After assets are distributed and administration is complete, the successor trustee can close the trust. Successor trustees should get a written agreement among all beneficiaries that trust administration has successfully completed so that the living trust and all of its trust accounts may be closed.
Last updated on January 12, 2022