The Practical Planner: Intro to Revocable Trusts vs Irrevocable Trusts

Episode Release Date: November 21, 2023
Hosts: Thomas Kopelman, Co-Founder of Allstreet Wealth & Ann Rhodes, Chief Legal Officer of wealth.com

Introduction

In the fourth episode of The Practical Planner, hosts Thomas Kopelman and Ann Rhodes delve into the intricacies of estate planning, specifically focusing on revocable and irrevocable trusts. Aimed at financial advisors seeking to enhance their estate planning strategies, this episode demystifies the complexities surrounding trusts and provides actionable insights for effective client service and business growth.

Understanding Trusts: Definitions and Fundamentals

Revocable Trusts Defined

Thomas initiates the discussion by addressing common confusions between wills and trusts. He states, “Revocable is often the same term as a living trust. They’re used interchangeably, but they basically mean a trust while the person who signed the trust is alive” (00:27).

Ann elaborates, emphasizing the flexibility of revocable trusts: “It’s a trust that even though you’ve signed it and it already owns assets, somebody retains the power to just do away with it” (05:02).

Irrevocable Trusts Explained

The conversation transitions to irrevocable trusts, which Ann describes as significantly more rigid: “Irrevocable trust. Just think so hard to change” (03:46). Unlike revocable trusts, irrevocable trusts require careful consideration before establishment, as altering them post-creation is challenging and often legally constrained.

Key Differences Between Revocable and Irrevocable Trusts

Flexibility vs. Permanence

Thomas summarizes the core distinction: “Revocable trust, living trust, same thing. And they tend to be succession documents, meaning what happens upon death” (07:29). Revocable trusts allow the grantor to modify or revoke the trust during their lifetime, maintaining control over the assets.

In contrast, Ann highlights the permanence of irrevocable trusts: “Irrevocable is like, okay, like a different world, harder to change, very goal oriented” (13:30). Once assets are placed in an irrevocable trust, reversing the decision is typically not feasible, emphasizing their use for specific, long-term objectives.

Privacy and Tax Planning

The hosts discuss privacy and tax implications, clarifying misconceptions. Ann points out that while revocable trusts do offer privacy at death by avoiding probate—a public legal process—during the grantor’s lifetime, the revocable trust does not conceal asset ownership: “The privacy aspect of his revocable trust could not be achieved” (07:29).

Regarding tax planning, Ann mentions that revocable trusts can incorporate elements of tax strategy through nested irrevocable trusts, though this adds complexity: “Revocable trust, you can actually do some tax planning with it” (10:11).

Common Use Cases for Revocable Trusts

Avoiding Probate

One of the primary advantages of revocable trusts discussed is the avoidance of probate. Ann notes, “Instead of having a will that will be posted on some court docket, instead you have a revocable trust” (07:29). This ensures that the distribution of assets remains private and expedites the transfer process upon the grantor’s death.

Managing Assets Across Multiple States

Thomas provides a practical example for clients owning property in different states: “By dying without a trust that owns the home, the executor is going to have to open probate... in all the other states where they own property” (16:18). Placing real estate within a revocable trust can streamline the probate process across jurisdictions.

Supporting Young Beneficiaries

The episode also touches on planning for minor children or young beneficiaries. Ann suggests using revocable trusts to control the distribution of assets over time: “There are some ways to control like too much money going to too young of a child... a trust is much better” (20:47). This approach ensures that beneficiaries receive funds in a managed and responsible manner.

Business Continuity

For business owners, revocable trusts offer a mechanism for seamless business operations in the event of the owner’s incapacitation or death. Ann explains, “You could do those options, but is it easier to say life insurance goes revocable trust” (19:18), highlighting how trusts can provide continuity and stability for business affairs.

Myths and Misconceptions About Wills and Trusts

Ann addresses several common myths that clients may have about wills and trusts:

1. Control Planning: It’s often misconstrued that wills cannot be used for control planning. Ann clarifies, “You can do this through a testamentary trust built into your will” (22:42), debunking the notion that only trusts offer detailed control over asset distribution.

2. Tax Planning: Another myth is that wills cannot facilitate tax planning. Ann refutes this by explaining, “You can still do like kind of Holy or Hail Mary planning with it” (23:09), indicating that wills can incorporate certain tax strategies, albeit less flexibly than trusts.

Integrating Estate Planning Tools with wealth.com

Thomas and Ann highlight the capabilities of wealth.com in facilitating estate planning:

• Testamentary Trusts: Ann mentions, “@wealth.com we have testamentary trusts” (24:07), indicating that the platform supports the creation of trusts within wills, providing customizable solutions for clients' diverse needs.

• Flexibility in Planning: Wealth.com remains agnostic between wills and trusts, allowing advisors to choose the most appropriate structure: “If you have a will based plan or a trust based plan, we are completely agnostic as to what’s better for you” (24:07).

Conclusion and Next Steps

Wrapping up the episode, Thomas and Ann encourage listeners to continue exploring estate planning topics in future episodes. They tease upcoming discussions on irrevocable trusts and delve deeper into related concepts like beneficiaries and trustees, ensuring advisors are well-equipped to address client questions comprehensively.

Ann concludes with an invitation to engage further: “If like beneficiary, trustee, like some of those are still like percolating in your head and you're like, can you just tell me what that is? That's coming up in next episode” (24:36).

Notable Quotes:

• “Revocable trust, living trust, same thing. And they tend to be succession documents, meaning what happens upon death.” – Ann Rhodes (07:29)

• “A will on steroids.” – Thomas Kopelman (07:29)

• “Irrevocable is like, okay, like a different world, harder to change, very goal oriented.” – Ann Rhodes (13:30)

Final Thoughts

This episode serves as a foundational guide for financial advisors navigating the complexities of revocable and irrevocable trusts. By clarifying definitions, distinguishing key differences, and addressing common misconceptions, Thomas and Ann provide a robust framework for advisors to enhance their estate planning services. Future episodes promise to build on this knowledge, further equipping advisors with the tools needed to serve their clients effectively.

Transcript Reference: All timestamps correspond to segments within the provided transcript.