Revocable Trust vs. Irrevocable Trust
A trust: what is it? You may know you need one but you are not certain what kind you need. Don’t get frustrated. There are really only two types:
- Living revocable trust
- Irrevocable trust
These are very different legal animals. When someone talks about a “family trust” they are usually referring to a the living revocable trust that they set up for probate avoidance and privacy. It is the most common type. It can be revoked at anytime and is not taxed as a separate entity. This also means that it isn’t going to provide any asset protection. When an attorney is planning to sue you, if he sees the words “family trust” he knows that the assets held in it are almost guaranteed to be available for the taking.
An irrevocable trust gives its owners lots of asset protection. It can never be revoked and has its own tax number. If you are sued they can’t get the property held there. However, when you put property in this type of vehicle, you are giving up ownership and control. Most Americans like to maintain control, so they opt for the living revocable trust.
A living revocable trust can be formed under a number of different names, such as a loving trust, family trust, marital trust, land trust, etc. Often the attorney will include a person’s name as part of the trust’s name. For instance, the name will read something like, “The John and Mary Doe Family Trust.” That actually tells you nothing about its legal structure, but it tells someone who is looking to find out what you own information that you do not need to give them.
I haven’t used the term “family trust” for years. Today, privacy is a major issue, and I advise clients to use an “odd” name. You can call the document anything you want. It is much more difficult to find you and your property if you call it the JMD Trust instead of using the John and Mary Doe Family Trust format. Including your name in the title provides a potential identity thief with too much information. Using a name like the “Pretty Tree” doesn’t give the identity thief any information about who the grantors or beneficiaries of the document might be. It also doesn’t tip your hand as to what type of vehicle it is.
I expect the term “family trust” to become rarer in the actual title of the document.
HOWEVER, there is a legal meaning for the term “family trust” that you should know. When one of these is established for a couple, and estate taxes are concerned, the document will be designed to create two parts, a “shelter trust” and a “marital trust.” Assets with a value up to the “exemption equivalent” (the amount of property that can be passed to heirs without an estate tax actually being payable) will be isolated in the shelter trust and the remainder of the assets will be held in the other part. The shelter trust is taxed at the death of the first spouse to die, and the rest of the assets are taxed at the death of the surviving spouse. Splitting the estate this way allows the couple to get more money out of the estate, tax free.
How to save on estate taxes is another topic that I cover in my book Protecting Your Financial Future.
Lee Phillips, JD
