Revocable v. Irrevocable Trusts – Video Transcription

Hello. My name is Kyle Krasa and I’m an estate planning attorney in Pacific Grove, California. I’m certified by the state bar of California, as a legal specialist in estate planning trust and probate law. The purpose of this video is to give you general information about an important aspect of estate planning law so that you can be prepared when working with your own attorney. Watching this video does not establish an attorney client relationship. The law is far more complex and nuanced than can be explained in a few short minutes. As a result, before acting on any of the information contained in this video, you should consult a competent attorney who is licensed to practice law in your community. With that understanding, I hope you enjoy my video and you find it informative. Thank you. 

There are two distinct types of trusts: revocable trusts and irrevocable trusts. And the purpose of this video is to give you a general overview of the differences between these two categories of trusts. 

Now, first a revocable trust. A revocable trust, you can change or cancel the trust anytime you want. So nothing is set in stone with a revocable trust. With an irrevocable trust you can’t – and I’m going to put in here with a star – you can’t easily change or revoke or cancel an irrevocable trust. You can still do it under certain circumstances, but you have to find an exception. There actually are quite a few exceptions, so there are ways to change or cancel an irrevocable trust, but it’s just not as easy and as simple as a revocable trust. 

Now with a revocable trust, the Tax ID number is going to be the trust-maker’s, Social Security Number. With an irrevocable trust most of the time – I’ll put another star here – but most of the time you’re going to get a separate Tax ID Number or Employer Identification Number for the trust. So the trust is going to have its own taxpayer identification number whereas a revocable trust will have the trust-maker’s social security number. 

With a revocable trust typically the income earned on the revocable trust is going to be reported on the trust-maker’s, personal tax return, whereas with an irrevocable trust, and again, most of the time the income is going to be reported on a special trust tax return at 1041, a federal tax return. 

With a revocable trust, the person creating the trust has complete control over the trust assets, can do whatever they want. With an irrevocable trust, the control is limited to the instructions of the trust itself. So there are limitations on what can be done. 

Now, what are some reasons for doing a revocable trust? Well, the main reason with a revocable trust is basic estate planning. The idea behind the revocable trust is that you want to make sure that there’s an efficient mechanism for the management and distribution of your assets in the event of your incapacity and upon your death while avoiding court intervention, whenever possible. Right? So you want to create a streamlined, a simple procedure for managing your assets in the event of your incapacity or death. While you’re living, you still want to have complete control of your assets, and you want to be able to change your mind about what the estate plan says. Maybe you want to change the beneficiaries or change the conditions that you put on there or change the trustees. So you still want to have complete control of your assets. You’re just planning for the future. You’re planning for the possibility of your incapacity or death. 

With an irrevocable trust – why would you want to create an irrevocable trust while you’re still living? Well, there are certain reasons. There are certain, gift and estate tax reasons to form an irrevocable trust. You might want to try to lower the size of your estate by making certain gifts. And you can take advantage of certain tax planning opportunities by putting it into an irrevocable trust rather than just gifting it to the beneficiaries directly. You might want to take advantage of some income tax planning as well. And you might want to give your beneficiary some asset protection or divorce protection. So an irrevocable trust can provide for those kinds of protections as well whereas your revocable trust won’t. 

Now, one thing that’s interesting is that even though there are all these separate and distinct possibilities and revocable trusts are typically your more basic and foundational type of estate planning, this is more applicable to the vast majority of clients and an irrevocable trust is typically more advanced planning when it comes to taxation. Sometimes it could be for Medicaid eligibility, for asset protection, but inevitably every revocable trust will convert into an irrevocable trust once the trust-maker passes away. And that makes sense. And if you think about it, you have a trust it’s revocable. You can change your mind. If you get mad at the beneficiaries, you can write them out. You can add new people, you can change the conditions, but once you pass away, you want to make sure that your wishes are carried out. So at that point, your wishes become solidified and your successor trustee, who’s managing it, can’t change the material terms of your trust. And so then all of these aspects of the irrevocable trust will apply at that point, we’ll have to switch to tax ID number from your social security number to a new tax ID number. We’ll have to switch the tax return. So until the trust gets distributed to the beneficiaries, there’s going to have to be a separate tax return filed for the trust assets. The trustee can’t just change the provisions and say, I’m going to change the beneficiaries. They have to follow what your instructions were. 

So I hope this gives you a good kind of general overview about the difference between a revocable trust and an irrevocable trust and why you might do one trust or the other.

I hope you enjoyed watching my video. As I mentioned at the beginning, this is not intended to be a substitute for proper legal counsel. Before acting on any of the information contained in this video, you should consult a competent attorney who is licensed to practice law in your community. Thank you.