When should I have a revocable trust? When should I have an irrevocable trust? I hear these questions often from clients.
I always like to start any discussion of a complex subject with definitions. A trust is a fiduciary relationship through which one person, called the “trustee,” holds assets for the benefit of another person, called the “beneficiary.” The trustee has a duty of care to hold the assets of the trust and to administer and to invest those assets for the benefit of the beneficiary.
The written document that most people would call “the trust” is actually the “trust agreement.” The trust agreement is the written expression of the terms of the trust. The terms of the trust tell the trustee how to administer the assets of the trust. For instance, the terms of the trust might tell the trustee to distribute the assets of the trust to the beneficiary for the beneficiary’s health, maintenance, support, and education; or the terms of the trust might tell the trustee to distribute the assets of the trust to the beneficiary at the trustee’s sole and absolute discretion.
The person who hires the lawyer to draft the trust agreement and who places his/her assets in the trust is called the “grantor.” The grantor could be the initial trustee and the initial beneficiary of the trust, or a different person could fill each of these roles.
A “revocable trust” is a trust agreement the terms of which the grantor retains the right to revoke or amend. In other words, the grantor could completely revoke the trust or could amend the trust or both at any time he wants to revoke or amend the trust. With a revocable trust, the grantor has not given up control of the asset that the trustee is holding in the trust for the benefit of the beneficiary.
An “irrevocable trust” is a trust agreement the terms of which the grantor cannot revoke or amend; however, just because the grantor cannot revoke or amend the terms of the trust does not, in and of itself, mean that the grantor has no access to the assets of the trust. The terms of an irrevocable trust could instruct the trustee to distribute the assets of the trust to the grantor-beneficiary for his health, maintenance, support, and education. In other words, the terms of an irrevocable trust cannot be modified or revoked but the terms of the trust could still permit distributions to the grantor-beneficiary.
For that matter, the terms of a revocable trust could instruct the trustee to never distribute the assets of the trust to or for the benefit of the grantor-beneficiary, but this instruction would be muted by the fact that the grantor could simply revoke or amend the terms of the revocable trust. Whether a trust is revocable or irrevocable does not dictate the terms of the trust.
Why would someone want a revocable trust or an irrevocable trust? In my opinion, a revocable trust is primarily used to avoid probate. Probate, in New Jersey, is the process of proving the validity of a last will and testament. When a person dies, his executor brings his Will to the surrogate—an elected official in each county—to prove that the Will is valid. Most every Will is a valid Will. A valid Will is a Will that meets the basic signing requirements of a Will. Since probate is only proving that the Will is a valid Will, the process of probate in New Jersey takes about thirty minutes and costs about $200, irrespective of the value of the estate.
Because probate is so simple in New Jersey, I rarely recommend that a client use a revocable trust to attempt to avoid probate in New Jersey. On the other hand, if a client tells me that he owns real estate in another state—such as Florida—I almost always recommend that he use a revocable trust to avoid probate in the other state. By putting his Florida house in the revocable trust, he can eliminate the requirement that his executor probate his Will in Florida, a state in which probate is costly and time-consuming.
Why would someone want an irrevocable trust? There are many reasons. One common reason is to shelter the grantor’s assets from long-term care costs. For instance, if the grantor places his house into a properly-drafted irrevocable trust, he can protect his house from potential, future long-term care costs. A revocable trust would be ineffective to shelter the house from potential long-term care costs.