Understanding When a Revocable Trust Becomes Irrevocable

Conversations revolving around Estate Planning and Trusts typically go hand in hand. While very useful, establishing and then also planning for a future with a Revocable Living Trust should be approached carefully and with proper legal advice. In this post, we’ll discuss how a Revocable Living Trust becomes Irrevocable and how to best plan for when it does.

Revocable Living Trusts vs. Wills: Key Differences to Know

When thinking about an estate plan, one common useful tool is a will. There are some key differences between a trust and a will. Perhaps the biggest one is the fact that simply drafting a will does not protect your assets from going to probate. What it does is identify who you would like to assign as the executor – essentially the “manager” of your estate when you pass away. While this is certainly not all there is to a full estate plan, it does accomplish one of the basic steps of estate planning: establishing a direction for at least some of your assets and not leaving the power in the hands of the probate courts. 

Another key difference is that a will does not establish any separate entities. As mentioned above, a will defines who gets what when you pass away and appoints the proper person(s) to ensure your wishes are carried out. A trust, on the other hand, establishes a separate legal entity designed to hold the assets of the grantor. This avoids probate and allows for special provisions, gifts, allocations, and many other customizable features.       

Why to Set up a Revocable Living Trust

The most common type of trust is a Revocable Living Trust, also known as a Grantor Trust. These types of trusts allow the Grantor (person who creates the trust) to transfer their assets under the umbrella of the trust. A Grantor Trust is typically created under the Grantor’s Social Security Number, allowing them to file taxes under their own name and social security number.  

A Grantor Trust also allows the Grantor to designate one or multiple successor trustees and beneficiaries, allowing them to have flexibility and control over who and when will receive the assets when they pass away. If a Grantor has a large extended family, blended family, or multiple marriages, a Trust allows one to designate multiple avenues for his or her beneficiaries.  

A third benefit of a Grantor Trust is that it will typically bypass probate, allowing the beneficiaries of the trust to access the trust assets more easily and without ambiguity. If established properly, a Grantor Trust is also very difficult to contest in court, creating a stronger estate plan and more assurance for heirs and beneficiaries.

How A Revocable Living Trust Helps Your Family Avoid Probate

One of the main benefits of a Revocable Living Trust is that it will typically bypass probate, allowing the beneficiaries of the trust to access the trust assets more easily and without ambiguity. If assets are titled in the name of an individual or jointly without any beneficiary designations, those assets transfer into the name of the estate and go through the probate process. This can be a lengthy and expensive process, usually dependent on the court assigned to the estate and the complexity of the estate.  

If established properly, a Revocable Living Trust can be very difficult to contest in court, creating a stronger estate plan and offering more assurance to heirs and beneficiaries. This can be especially useful in situations involving blended families or estranged family members who may think they have a claim to the assets of the estate. By intentionally outlining the wishes of the grantor, a trust can present a very clear and compelling case against someone trying to contest the estate plan in court.  

Tax Reporting Changes  

Since the assets in a Grantor Trust are tied to the Grantor’s Social Security Number, the Trust changes to an Irrevocable Trust when the Grantor passes away. For tax purposes, a new Tax ID Number will then need to be generated from the Internal Revenue Service and used for the Trust moving forward. In this way, the Trust never really “passes away”; it simply changes forms and is now a full-fledged entity instead of an extension of the Grantor.  

When the original Grantor passes away, the assets in the original trust will be frozen and must be moved into the Irrevocable Trust with the new Tax ID Number. Most banks and financial institutions will require documentation of the original trust showing who the successor trustee(s) are, as well as the new Tax ID Number from the IRS.

Trust Management Changes  

Another change that will occur when the Grantor passes away is the responsibility of the trust management. There are typically three components in Grantor Trusts – the Grantor, the Trustee, and the Beneficiary. In most Grantor Trusts, the three roles are all held by the Grantor while he or she is still living.  

When the Trust is established, the Grantor will designate who the successor trustee(s) will be. This commonly falls to a surviving spouse, child(ren), or other next of kin. In the case of multiple children, the Grantor can designate one children as the sole successor trustee, or multiple children as co-successor trustees. When the Grantor passes away, the trust management responsibilities will then be assumed by the Successor Trustee(s). 

In the case of co-successor trustees, some trusts will specify that trustees will be able to act independently, while other trusts may indicate that trustees may not act without the agreement of the others. This is important specifically in the case of working with banks and financial institutions when distributing assets and making account changes.

Choosing the Right Successor Trustee 

When thinking about who to choose as successor trustee for your Revocable Living Trust, consider selecting someone with some or all of the following characteristics: 

• Competency: While it’s tempting to pick someone who’ve you’ve known for a long time or get along well with, it’s important to choose someone who can handle the financial and non-financial responsibilities of a trustee. This may or may not be a family member, but should be someone who is capable of handling the mental and emotional stress of managing financial assets on behalf of someone else.  

• Experience: Someone with experience handling financial or legal matters can be a valuable trait for someone serving as a trustee.  

• Integrity: Conflicts of interest can arise frequently in trust/probate situations. Therefore, it is important to choose someone who has demonstrated integrity when faced with difficult decisions.  

Note: in many cases, a trustee carries a fiduciary responsibility to ensure they are performing duties appropriately. This can involve potential legal liability if they do not act under the appropriate standards of care. Consider consulting with an attorney to understand the potential liability if you are asked to serve as a trustee.

Other Considerations   

As mentioned above, a Revocable Living Trust can be a very useful tool when doing Estate Planning. However, any tool should be evaluated on its ease of use and effectiveness. If done incorrectly, establishing a Revocable Living Trust can create additional hassle that successor trustees might view as not being worth it.  

Additionally, creating too many “strings attached” for beneficiaries to inherit the funds in the trust can make it feel as though the future inheritance is more of burden than a hassle. This can potentially taint the legacy of the Grantor in the eyes of the beneficiaries in a negative light as opposed to a legacy of generosity or thankfulness.

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This content is developed from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Evergreen Financial Group, LLC is a registered investment advisor offering advisory services in Montana, Utah, Wyoming and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision. All opinions and estimates constitute Evergreen Financial Group’s judgement as of the date of this communication and are subject to change without notice. Evergreen Financial Group does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk.