Estate planning clients begin their planning process with the expectation that they will be creating some type of trust for their heirs. Often, clients anticipate conveying their assets in to some form of trust, but they typically do not understand how different types of trust fit in to the estate planning process.
Trusts are initially distinguished by whether they are revocable or irrevocable. Most estate planning trust that dispose up property upon death are revocable trust. Just as you can make a codicil or amendment to your will your estate planning trust reserves your right to revoke or amend your trust for any reason during your life time. Upon death, your estate planning trust become irrevocable. That means that your heirs, your trust beneficiaries, cannot change the terms of your trusts. The trust is “locked” at death; the plan you set up during your lifetime goes into effect upon your death. Written notes, memorandum given to family member, or gave oral instructions to a family member will not change your estate planning trust once it becomes legally irrevocable. That is why it is important to make changes to your estate plan by properly drafting and executing formal amendments to your living revocable trust while you are alive.
Some trusts are designed to be irrevocable from the time they are made. An example is a trust set up for your children where you gift property during your lifetime for the benefit of your children. Once your gift assets to an irrevocable trust for the benefit so someone else you may not change your mind and get back the assets. Another example of a designed irrevocable trust is an “insurance trust.” There are tax benefits and asset protection benefits of holding life insurance in the name of an irrevocable trust. The death benefit of life insurance, the amount paid to your family members upon your death, is part of your taxable estate, except when the life insurance is owned by an irrevocable trust. The death benefits paid to family members is vulnerable to their creditors upon receipt, but the death benefit is protected from their creditors if the money is held inside an irrevocable insurance trust that the insured had established during his lifetime.