Revocable Trusts Versus Irrevocable Trusts
First, some definitions:
- The person making the trust, the trust owner, is called the grantor.
- The person in charge of managing and/or distributing a trust is called the trustee.
- While the grantor is alive and competent, she can be both the grantor and the trustee. At her death, another person or persons take over to carry out the terms of the trust. These are called successor trustees.
- Those who are given the trust assets as set out in the trust agreement are the trust beneficiaries. The grantor can also be a trust beneficiary during her lifetime.
Revocable means that the trust is changeable by the grantor. People don’t often revoke their trust but do amend them as circumstances change. If the trust is irrevocable, it usually can be neither revoked nor amended. We do use irrevocable trusts in certain situations, which will be described later.
A living trust (sometimes called an inter vivos trust) just refers to the fact that the trust comes into existence while the trust grantor is alive, rather than coming into existence at her death. A testamentary trust—one contained within the provisions of a will—is not a living trust, since it does not come into existence until the grantor’s death. A trust, when signed, is something like a business. Example: The Doe Bakery Corporation is a business and can have multiple bank accounts in its own name. It can own the bakery building, the delivery van, the equipment and supplies, even the doughnuts belonging to the business. But Mr. and Mrs. Doe own the Doe Bakery. The business, as a corporation, has a set of bylaws, which are rules governing how the business operates. If the owners die, the business is still alive and likely still making doughnuts under new management.
A trust is like that in many ways. Your trust can own your real estate, bank accounts, investments, vehicles, personal property and furniture, and can be the beneficiary of insurance and accounts, but you own the trust. So long as you are alive and competent, you can revoke the trust, change its terms, and spend its assets. The trust has instructions that determine how changes can be made, the powers trustees have in relation to borrowing against or buying and selling assets, and what happens if you, the trust grantor, become disabled or die. It can continue in existence after your death to provide management of assets for your heirs. It is very important that all the appropriate language be in the trust document to most effectively carry out your wishes.
A trust, as a legal entity, actually needs a name so that assets can be transferred into and out of the name of the trust. Investment accounts will be under the name of the trust and it can have its own federal tax employer identification number rather than using the grantor’s Social Security number. It might be called any of these names:
