Isaac Yedid, Esq. & Raymond Zeitoune, Esq.

When it comes to understanding trusts, knowing the difference between revocable and irrevocable trusts is crucial. If you ask for a revocable trust and get an irrevocable one, or vice versa, the legal and tax consequences will be significant.

A Revocable Living Trust, also called a Revocable Trust, Living Trust or Inter Vivos Trust, is simply a type of trust that can be changed at any time. In other words, if you have second thoughts about a provision in the trust or change your mind about who should be a trust beneficiary or trustee, then you can modify the terms of the trust through what is called a trust amendment. Or, if you decide that you do not like anything about the trust at all, then you can either revoke the entire agreement or change the entire contents through a trust amendment and restatement.

Since Revocable Living Trusts are so flexible, why aren’t all trusts revocable? Because the down side to a revocable trust is that assets funded into the trust will still be considered your own personal assets for creditor and estate tax purposes. This means that a revocable trust offers no creditor protection if you are sued, all of the trust assets will be considered yours for Medicaid planning purposes, and all assets held in the name of the trust at the time of your death will be subject to both state and federal estate taxes and state inheritance taxes.

So why should you use a Revocable Living Trust as part of your estate plan? For three important reasons:

1. To plan for mental disability – Assets held in the name of a Revocable Living Trust at the time a person becomes mentally incapacitated can be managed by their Disability Trustee instead of by a court-supervised guardian or conservator.

2. To avoid probate – Assets held in the name of a Revocable Living Trust at the time of a person’s death will pass directly to the beneficiaries named in the trust agreement and outside of the probate process.

3. To protect the privacy of your property and beneficiaries after you die – By avoiding probate with a Revocable Living Trust, your trust agreement will remain a private document and avoid becoming a public record for the entire world to see and read. This will keep the details about your assets and who you have decided to leave your estate to a private family matter. Contrast this with a Last Will and Testament that has been admitted to probate – it becomes a public court record that anyone can see and read.

An Irrevocable Trust is simply a type of trust that cannot be changed after the agreement has been signed, or a revocable trust that by its design becomes irrevocable after the Trust maker dies.

With the typical Revocable Living Trust, it will become irrevocable when the Trust maker dies and can be designed to break into separate irrevocable trusts for the benefit of a surviving spouse, such as with the use of AB Trusts or ABC Trusts, or into multiple irrevocable lifetime trusts for the benefit of children or other beneficiaries.

Irrevocable trusts can take on many forms and be used to accomplish a variety of estate planning goals such as the following:

• Estate Tax Reduction

Irrevocable trusts, such as Irrevocable Life Insurance Trusts, are commonly used to remove the value of property from a person’s estate so that the property cannot be taxed when the person dies. In other words, the person who transfers assets into an irrevocable trust is giving over those assets to the trustee and beneficiaries of the trust so that the person no longer owns the assets. Thus, if the person no longer owns the assets, then they cannot be taxed when the person later dies.

As mentioned above, AB Trusts that are created for the benefit of a surviving spouse are irrevocable and, thus, can make full use of the deceased spouse’s exemption from estate taxes through the funding of the B Trust with property valued at or below the estate tax exemption. Then, if the value of the deceased spouse’s estate exceeds the estate tax exemption, the A Trust will be funded for the benefit of the surviving spouse and payment of estate taxes will be deferred until after the surviving spouse dies.

• Asset Protection

Another common use for an irrevocable trust is to provide asset protection for the Trust maker and the Trust maker’s family. This works in the same way that an irrevocable trust can be used to reduce estate taxes – by placing assets into an irrevocable trust, the Trust maker is giving up complete control over, and access to, the trust assets and, therefore, the trust assets cannot be reached by a creditor of the Trust maker or an available resource for Medicaid planning. However, the Trust maker’s family can be the beneficiaries of the irrevocable trust, thereby still providing the family with financial support, but outside of the reach of creditors. There are also irrevocable trusts called Self-Settled Trusts or Domestic Asset Protection Trusts that in some states, including Alaska, Delaware, Nevada, and Tennessee, offer creditor protection and allow the Trust maker to be a trust beneficiary.

In addition, as mentioned above, the various irrevocable trusts that can be created for the benefit of the Trust maker’s surviving spouse or other beneficiaries after the Trust maker of a Revocable Living Trust dies can be designed to offer asset protection for the trust beneficiaries.

• Charitable Estate Planning

Another common use of an irrevocable trust is to accomplish charitable estate planning, such as through a Charitable Remainder Trust or a Charitable Lead Trust. If the Trust maker makes the initial transfer of assets into a charitable trust while still alive, then the

Trust maker will receive a charitable income tax deduction in the year of the transfer is made. Or, if the initial transfer of assets into a charitable trust doesn’t occur until after the

Trust maker’s death, then the Trust maker’s estate will receive a charitable estate tax deduction.

Conclusion:

Various types of Trusts can be very useful for many different types of individuals for many different reasons. May we all merit living long, healthy and happy lives – amen!

The attorneys in the Trust & Estates Practice Group at Yedid & Zeitoune have over a combined 20 years of legal experience and are ready to assist you with all your estate planning needs.

Isaac Yedid, Esq. and Raymond Zeitoune, Esq.

Yedid & Zeitoune, PLLC

1172 Coney Island Avenue Brooklyn, New York 11230

Phone: (347) 461-9800 Fax: (718) 421-1695 Email: [email protected]

NYC Office – By Appointment Only:

152 Madison Avenue, Suite 1105 New York, New York 10016