A trust is a legal entity set up during a beneficiary’s lifetime by a third party to ensure assets are spent in accordance with the person setting up the trust’s wishes. Trusts can also avoid certain tax consequences and the headache of the probate process. If you have set up a trust, you may be wondering if the terms of that trust are modifiable after it’s been signed on the dotted line. Changes in circumstance, such as a changed relationship with a beneficiary or a change in your financial situation, may spark reasonable questions about any trusts you have set up.
The short answer: it depends. If your trust is set up as a revocable trust, you can change the terms at any time. If your trust is set up as an irrevocable trust, it can’t be modified unless any and all relevant beneficiaries provide consent. There are different benefits to each type of trust, and different circumstances may indicate the need for one, the other, or a combination.
What is a Revocable Trust?
A revocable trust is also known as a living trust. The person who created the trust, or grantor, can change the terms of the trust at any time. Changed terms include changed requirements on asset management requirements and the removal or addition of beneficiaries, but the exact rules vary by state.
While this flexibility can be beneficial, there are a few downsides to revocable trusts that should be relevant in any decision to set one up. First, assets are less protected, meaning creditors and counterparties in lawsuits can access the trust in the event of a negative judgment. Taxation is also a key consideration: assets held in a revocable trust will be assessed federal and state estate taxes. This can often be a substantial hit on the funds your beneficiary ultimately receives.
What is an Irrevocable Trust?
On the other hand, an irrevocable trust becomes permanent immediately when made. Only in very limited circumstances can changes be made to the terms of an irrevocable trust. Beneficiaries can consent to changes or a court can order them, but the trust creator cannot generally unilaterally make modifications.
Taxes are a key consideration in favor of irrevocable trusts. Irrevocable trusts are not subject to estate taxes, and assets placed inside the trust do not incur taxes to the creator of the trust if they earn income. And because they are protected from creditors and lawsuits in a way that revocable trusts are not, they may be desirable for individuals in professions at high risk of litigation.
Do You Need Help Setting Up a Trust?
It’s best to have help when navigating the different requirements around modifying revocable trusts or setting up an ironclad irrevocable trust. The team of Texas attorneys at McCulloch Miller, PLLC are experienced estate planning attorneys with decades of knowledge in trusts and estates. Contact our office at 713-936-9073 to schedule a consultation with an attorney on our team.