Trusts can be a powerful estate planning tool. Among other things, trusts allow you to allocate assets for long-term investment to pay dividends for your children and grandchildren, protect certain assets and investments from creditors, minimize the tax impact of your death, and drastically simplify the distribution of your estate.
But what if you want to dissolve your trust before you die? What if you need to start from scratch, need to completely reallocate your assets, or have decided against using a trust, with all the administrative fees and considerations that follow?
The good news is that trusts can be amended as well as revoked. In many cases, unless you’ve decided to cancel your trust outright, you can make major sweeping changes to how your trust functions via these amendments. Regardless of whether you decide to completely revoke a trust or rework it, it’s paramount to consult a professional – preferably the same person who wrote the initial trust document. Let’s go through the steps together.
What is a Living Trust?
A living trust is a trust entity established while the grantor of the trust (you) is still alive. Living trusts are managed by appointed trustees, who administrate the trust for one or more designated beneficiaries.
The terms of a trust are outlined in a specialized, notarized trust document, while the contents are represented by an associated asset list. Despite this list, however, the grantor of the trust must personally fund any assets into the trust itself by amending their respective ownership documents (i.e. John Doe’s bonds and securities become the bonds and securities of the Trust of John Doe).
Living trusts go into effect immediately, meaning that whatever is funded into the trust will technically exist under ownership of the trust, rather than ownership of the grantor. However, most of the time, grantors retain some level of control over their assets and properties held in trust.
The functional difference between a trust and a will is that the former provides a much greater range of benefits in the management of wealth both in life and in death, whereas the latter is a set of instructions for the distribution of an estate after death.
Trusts are also far more flexible than many other estate planning documents. A trust can be used to manage wealth for a disabled loved one, protect assets from creditors, reduce the state and federal estate tax burden on an estate, or even provide a trust fund for a pet’s care until death.
But each of these use cases requires very specific legal language and may entail different limitations. Chief among these limitations is the difference between revocable and irrevocable trusts.
Revocable vs. Irrevocable Trusts
The main difference between a revocable and irrevocable trust is that the former can be altered at any time, whereas an irrevocable trust is set in stone, metaphorically.
Revocable trusts grant greater flexibility and often come with the benefit that the grantor retains more control over the assets funded into the trust. With an irrevocable trust, on the other hand, comes a greater degree of separation, removing a grantor from their wealth, and limiting their control.
Revocable trusts are often used because of their flexibility. However, as a result, the assets placed within a revocable trust are not kept safe from creditors, nor are they removed from your estate total when calculating tax liability.
Irrevocable trusts, because of their separation from the grantor, effectively allow you to shelter certain assets from taxes and creditors alike. As a result, you have less control – and no chance to amend your trust.
Revoking a Revocable Trust
So, say you’ve decided that your trust simply isn’t going to work for you anymore. You have realized that a recent life change has led to a shift in priorities, and you do not wish to manage your assets in a trust the way you previously did. Perhaps it was a death in the family, or a new birth, or a divorce, or a completely different experience altogether.
How might you go about changing a revocable trust? Thankfully, it’s quite simple. Any changes made to a trust can be tacked on via amendments. Discussing these with a lawyer specializing in trust law, or an estate planning professional, is important.
Revoking a revocable trust altogether is a little more involved.
You begin by removing all assets previously transferred into the trust. Then, obtain and fill out a complete revocation form. You will have to explain why you chose to revoke your trust (usually because of a change in circumstance, and so on). This document may also be known as a trust revocation declaration. The idea here is that you present a formal document that irrevocably states your wish to dissolve the trust.
From there, you should have the document signed by the grantor, notarized, and potentially filed in court.
Are Irrevocable Trusts Truly Irrevocable?
Yes, although the process here is a bit different. Essentially, all parties have to agree to dissolve the trust, or a court order is needed. Special clauses written into an irrevocable trust during its creation may also give the trustee and beneficiaries the ability to revoke the trust.
Building a Solid Estate Plan
Trusts are often just one part of a greater, more comprehensive estate plan. But what might that look like?
The answer will depend on what your needs and circumstances are. Rather than suggest specific documents, ask yourself the following:
- Who will, can, or would want to make financial decisions for you, should you be alive yet incapacitated?
- Who will, can, or would want to make health care decisions for you under these circumstances?
- What procedures or life-saving measures would you veto, given a long-term health condition, life-threatening incident, or progressive disease?
- To what degree do your dependents possess financial maturity, and have you talked to them about inheritance?
- How strained are the financial relationships in your family, and is there cause for concern in the stability of your family?
Estate plans are not to be taken lightly. Even simple clerical errors can come back to haunt you and your loved ones. Be sure to set up your estate plan with a professional and avoid unnecessary costs and heartache.