Revocable and Irrevocable Trust – The Key Differences in Louisiana
Trusts are created to protect and manage assets – which makes them a handy tool to use in estate planning. But not all trusts are created equally. Trusts that can be modified or terminated do not have the same legal effect as trusts that cannot be changed. Understanding the differences between revocable and irrevocable trusts will help you determine which type of trust can best accomplish the estate planning goals you would like to achieve.
Reasons People May Decide to Create a Trust
People can create trusts to shift some of the legal responsibilities of ownership to another entity while retaining some of the benefits. People may also create trusts to serve as asset managers for persons who may not be competent or able to manage assets on their own.
Trusts can own and transfer property. Some pay their own taxes. They have legal authority once they are created and don’t require court involvement to carry out their terms. Trusts are not public documents, and their terms are not available for public inspection. The legal validity of a trust is less likely to be challenged than a document that requires court enforcement.
Trusts may be created for any of the following purposes:
- To keep beneficiaries from wasting or mismanaging assets
- To take advantage of favorable tax laws
- As a vehicle for transferring assets
- To keep assets out of the reach of creditors
- To gain or retain qualifications for government-provided financial or medical benefits
- To preserve assets for future use
Revocable trusts are a type of trust that contains language allowing the trust terms to be changed or revoked by the person creating the trust. A person who creates a trust is called a settler in Louisiana. Revocable trusts – sometimes known as revocable living trusts – are used in estate planning as an alternative to a will because they can transfer property upon the death of the settlor without a court process.
The settlor of a revocable trust can also be the trustee – a person appointed as the legal owner and administrator of trust property. Revocable trusts are not separate tax-paying entities and trust assets are treated as owned by the settlor for tax purposes.
- Assets can be transferred in and out of the trust at any time during the settlor’s life
- Trust terms can be changed to meet changing circumstances without restriction
- Trust property can be transferred from the trust without going through probate after the settlor dies
- The trust can continue to exist for a period of time after the settlor dies
- Property must be transferred to the trust during the life of the settlor
- Property that does not get transferred to the trust is not governed by the trust
- When the settlor dies or becomes incapacitated, the trust becomes irrevocable
- There are no tax benefits to the settlor while living
- The trust will not help the settlor qualify for any needs-based government benefits
When a settlor creates an irrevocable trust, most of the terms of the trust may not be changed by the settlor. The settlor gives up certain rights to control the assets owned by the trust and, in exchange, is not considered the legal owner of the trust property – even though the settlor may retain some rights to benefit from the property in the trust.
- Minimize or avoid tax obligations
- Allow a settlor or other beneficiary to qualify for needs-based government benefits
- Protect property from division or distribution when certain events occur
- Could be used for a specific purpose
- Can continue in existence indefinitely
- Settlor generally cannot change trust terms
- Trust terms must comply with specific legal requirements to achieve the trust purposes
- Control and use of trust property are restricted
Are Irrevocable Trusts ever Revocable?
The idea of transferring property to an irrevocable trust may give people pause because it seems very final. What happens if circumstances change down the road? It’s probably more accurate to say irrevocable trusts are not easily revocable. There are certain powers that the settlor of an irrevocable trust can retain, and there are circumstances under which an irrevocable trust can be modified or revoked.
Under Louisiana law, a settler must expressly reserve the right to modify a trust, making it revocable, or it will be deemed irrevocable. The extent of the ability reserved will determine if a trust is revocable or irrevocable. Some administrative powers – like replacing the trustee – may be reserved by the settlor, and the trust may still be considered irrevocable.
A court may also order modification or termination of an irrevocable trust under the following circumstances.
- Continuing the trust unchanged would impair the purposes of the trust
- The market value of trust assets is less than $100,000, and the cost of trust administration is high relative to the value of trust assets
- The trust purposes have become impossible or illegal
Unlike some other states, Louisiana does not allow for modification or termination of a trust by agreement of all parties – settlers, trustees, beneficiaries – if the trust document does not specifically authorize it.
Determining Whether to Use a Revocable or Irrevocable Trust
Whether to use a revocable or irrevocable trust – or some combination of trusts – for estate planning will depend on what a settlor is trying to accomplish and the personal circumstances of the family involved.
Revocable trusts can be a good vehicle to use when the main goal of a settlor is to transfer assets upon death without court intervention or involvement. If a settler is interested in minimizing tax liability or wants to qualify for some other type of government benefit, an irrevocable trust is most likely the only way to accomplish those goals.
Trusts have to contain the correct language in order to work as intended. Some types of irrevocable trusts are very specialized, and the language will be scrutinized carefully to determine if the legal requirements have been met. Working with a Louisiana attorney experienced in estate and succession planning can ensure that the right type of trust is created to achieve a client’s desired outcome.