When to Consider a Revocable or Irrevocable Trust

By Spiro Verras

Trusts are key components of a comprehensive estate plan that offer a number of potential benefits. Two of the most common types of trusts used in estate planning are revocable and irrevocable trusts. There are advantages and disadvantages to both, and deciding which one is right for your unique plan will require consultation with an experienced Florida estate planning attorney. Verras Law is ready to serve you.

How trusts fit the plan

A trust is an arrangement in which a trustee holds and manages property for beneficiaries. The person creating it may also be a beneficiary, depending on the design. Trusts can support continuity during illness, provide ongoing management for loved ones and coordinate inheritance. Some also serve specific tax or public-benefit objectives.

A living trust, also called an inter vivos trust, is created during the settlor’s lifetime. A revocable trust generally allows the settlor to change or revoke it. An irrevocable trust generally limits unilateral changes, with retained rights and other flexibility determined by its terms and governing law.

Revocable trusts: Flexibility and continuity

As the name implies, a revocable trust is one that can be modified or revoked by the settlor. Assets can continue to be transferred into or out of the trust, so the settlor retains access and control of the trust property. In many cases, the settlor and trustee are the same individual. Some advantages of this type of trust are:

• Incapacity planning: A properly funded revocable trust can provide for a successor trustee to manage the assets it holds if the settlor becomes unable to do so.
• Estate administration: Property properly held in the trust can generally be administered under its terms without probate for that property. Probate offers a formal process for notices, objections and court accountability, which can be reassuring in some circumstances. The choice should reflect the family’s priorities.
• Flexibility: Since the terms of the trust can be modified and the trust can be dissolved, the revocable trust is flexible and adaptable to changing life situations like remarriage.

The planning should also address the following considerations:

• Creditor protection: A revocable trust generally adds no protection against the settlor’s own creditors. Any existing exemption for particular property requires a separate review.
• Tax treatment: A typical revocable trust attributes income to its creator and ordinarily leaves its assets in that person’s taxable estate. It can still contain provisions that serve important tax and family objectives at death.
• Medicaid planning: A revocable trust generally leaves its assets available to the settlor. Changing the title alone does not change the eligibility rules for countable and exempt property.

Irrevocable trusts: A lasting purpose

An irrevocable trust generally cannot be revoked or amended by the settlor acting alone. Some changes may be possible under its terms or governing law. Whether its assets are treated as the settlor’s for income tax, estate tax, creditors or Medicaid depends on the particular rules and retained rights. An appropriately funded trust can also provide for administration outside probate. Potential uses include:

• Beneficiary protection: A trust funded for another person may provide spendthrift and discretionary protection, subject to exceptions. Florida generally permits a settlor’s creditors to reach the maximum amount distributable to or for that settlor’s benefit, with statutory qualifications. The circumstances of any transfer also matter.
• Long-term care planning: Certain trust designs can assist with planning for Medicaid, but distribution provisions, resource rules and transfer penalties require review. An irrevocable label alone does not establish eligibility.
• Defined responsibilities: The document can specify the trustee’s authority, distribution standards and permitted retained powers. Those provisions should be designed together with the intended tax, benefit and protection results.

Before funding an irrevocable trust, consider these practical questions:

• Access: Decide which rights and resources you will retain. Some designs provide income or other benefits to the settlor, while others are intended for different beneficiaries. An adequate reserve outside the trust can help preserve your financial flexibility.
• Future changes: Trustee replacement, limited powers of appointment, modification or decanting may allow appropriate adjustments, subject to the document, applicable law and tax review.
• Funding and taxes: An irrevocable trust may attribute income to its tax owner or operate as a separate taxpayer. A nongrantor trust generally files Form 1041 when required. A lifetime gift of appreciated property generally carries the donor’s basis, and assets excluded from the donor’s estate generally receive no new basis merely because the donor dies. Cash, higher-basis assets and assets with strong growth potential can produce different results.

Choose a plan that fits

Many plans use a revocable trust for continuity and an irrevocable trust for a defined additional purpose. We can review your assets, your family’s needs and the amount of ongoing administration that makes sense. Contact Verras Law to arrange a conversation with Spiro in Palm Harbor, in Tampa or St. Petersburg by appointment, or by Zoom or teleconference.

For more detail, read our guide to revocable and irrevocable trusts. Primary references include Florida’s settlor-creditor rules, the IRS trust income-tax reporting instructions, and Revenue Ruling 2023-2 on basis.