Understanding Trusts: Revocable vs Irrevocable Explained

What Is a Trust and Why Do Paralegals Need to Know About Them?

A trust is a legal arrangement in which one person, the settlor, transfers property to another person or institution, the trustee, to hold and manage for the benefit of one or more beneficiaries. Trusts are a cornerstone of estate planning, and paralegals who work in this field draft trust schedules, prepare funding documents, and track assets. Certification exams routinely ask about the differences between revocable and irrevocable trusts, so a solid grasp of the basics will pay off.

The Parties to a Trust

• Settlor (also called grantor or trustor): the person who creates and funds the trust.
• Trustee: the person or entity holding legal title and managing the trust property. The trustee owes fiduciary duties of loyalty, prudence, and impartiality.
• Beneficiary: the person who receives the benefit of the trust property. Beneficiaries hold equitable title.

The same person may serve in more than one role, but a sole trustee who is also the sole beneficiary creates a problem called merger, which can terminate the trust.

Elements of a Valid Trust

To create a valid express trust, the settlor must have capacity and the intent to create a trust. There must be identifiable trust property, called the res or corpus, an ascertainable beneficiary, and a lawful purpose. Most states require a written document for trusts holding real property, and a trust with a testamentary effect must be executed with the formalities of a will. A trust will not fail for lack of a trustee, because a court can appoint one.

What Is a Revocable Trust?

How Does a Revocable Living Trust Work?

A revocable trust, often called a living trust, can be changed or canceled by the settlor at any time during the settlor's life, as long as the settlor has capacity. Typically the settlor serves as the initial trustee and names a successor trustee to take over upon death or incapacity. The settlor keeps full control of the assets and can add or remove property, change beneficiaries, or revoke the trust entirely.

What Are the Advantages?

• Probate avoidance: assets titled in the name of the trust pass to beneficiaries without going through probate, which saves time and keeps matters private.
• Incapacity planning: a successor trustee can manage the property without the need for a conservatorship.
• Flexibility: terms can be updated as family circumstances change.

What Are the Limitations?

A revocable trust provides no protection from the settlor's creditors, because the settlor retains control. It also gives no income tax or estate tax savings. For income tax purposes it is typically a grantor trust, so income is reported on the settlor's personal return, and the assets are included in the settlor's gross estate. A revocable trust becomes irrevocable at the settlor's death.

A common practice problem is failing to fund the trust. A trust document alone does nothing for assets that remain titled in the settlor's individual name. The paralegal's role often includes preparing deeds, assignments, and beneficiary designation changes so that the trust actually owns the property. A pour over will is typically used as a safety net to catch assets left out and move them into the trust at death.

What Is an Irrevocable Trust?

How Does an Irrevocable Trust Differ?

An irrevocable trust generally cannot be modified or revoked by the settlor once it is created and funded, unless the beneficiaries consent or a court approves the change under applicable law. By giving up ownership and control, the settlor gains certain legal and tax advantages.

What Are the Benefits?

• Estate tax reduction: properly structured, assets transferred to the trust are removed from the settlor's taxable estate.
• Asset protection: because the settlor no longer owns the property, it is generally shielded from the settlor's future creditors, subject to fraudulent transfer rules.
• Medicaid planning: transfers may help a person qualify for benefits, though lookback periods apply.
• Specific purposes: irrevocable trusts are used for life insurance, charitable giving, and special needs planning.

Common Types of Irrevocable Trusts

Examples include the irrevocable life insurance trust, the charitable remainder trust, the special needs trust, the spendthrift trust, and the qualified personal residence trust. A spendthrift provision restricts a beneficiary's ability to transfer a trust interest and protects it from most creditors.

Side by Side Comparison

• Control: revocable, the settlor keeps control; irrevocable, control is given up.
• Probate: both avoid probate for assets properly titled in the trust.
• Estate tax: revocable trust assets are included in the estate; irrevocable trust assets generally are not.
• Creditor protection: revocable offers none; irrevocable may offer substantial protection.
• Flexibility: revocable is flexible; irrevocable is rigid.

Testamentary Trusts and Other Trust Types

A testamentary trust is created by a will and takes effect only upon the testator's death, so it does go through probate. An inter vivos trust is created during the settlor's life. Be familiar with the rule against perpetuities, which limits how long a trust interest may remain uncertain, although many states have modified or abolished it for certain trusts. Also know the difference between express trusts, which are created intentionally, and implied trusts such as resulting trusts and constructive trusts, which courts impose to prevent unjust enrichment.

Trustee Duties and Breach

A trustee must administer the trust solely in the interest of the beneficiaries, avoid self dealing, keep trust property separate from personal property, keep accurate records, and inform beneficiaries. A trustee who breaches these duties may be personally liable, removed, and required to restore losses. Paralegals often assist with annual accountings and trust tax filings, such as IRS Form 1041.

Prepare for Your Exam

Trusts questions reward clear vocabulary. Our estate planning flashcards make it easy to memorize the parties, elements, and types. Create a free account to try sample questions, and review the plans available to unlock full length practice exams.

Key Takeaways

A revocable trust offers control and probate avoidance but no tax or creditor benefits. An irrevocable trust trades control for tax savings and asset protection. Always confirm that the trust is funded, and remember that trustees are fiduciaries held to high standards.