Understanding Irrevocable Trusts in Washington State

Revocable vs. Irrevocable Trusts

There are many different types of living trusts, but they all fall into two main categories: revocable and irrevocable. Here’s the difference: The terms of a revocable trust can be changed and the trust itself can even be dissolved. This type of trust does allow your heirs to avoid probate after your death and if you designate a successor trustee, it also protects your property in the event you become disabled. There are no tax advantages, however.

Because the trust can be changed at any time, it’s considered part of the person’s estate and is subject to estate tax. Most revocable living trusts convert into an irrevocable trust upon death. An irrevocable trust on the other hand, cannot be changed and is considered “permanent”.

There are of course, some exceptions to this and if the assets within the trust are sold, the trust is effectively dissolved. The advantage of an irrevocable trust is that your assets are not seen as a part of the estate, and therefore, not subjected to estate tax. Like the revocable trust, assets in an irrevocable trust are also not subject to probate.

Each person will have distinct goals in mind when they set up a living trust. When deciding whether a revocable or irrevocable living trust is best, consult with a good estate planning attorney.

Decanting a Bottle of Wine …or an Irrevocable Trust?

“It’s like decanting a bottle of wine; you pour the wine into a new bottle to air it out,” says Mark Haranzo, a partner at law firm Withers Bergman. In trust terms, you pour the assets of an old trust into a brand-new trust that essentially allows a redo.

Irrevocable trusts can be a great tool in planning for your estate. Unfortunately, the “irrevocable” nature of your irrevocable trust can be a big flaw if your objectives change. What happens if your irrevocable trust now conflicts with your goals?

Enter “decanting.” A recent article in Barron’s explored this common dilemma in an article with a catchy title: “How to Bust a Trust.”

The “irrevocability” of an irrevocable trust makes changing the trust a very difficult practice under normal circumstances. Normally, this is a good thing. Why have all of the time, effort, and money you invested to plan your estate be undone? Accordingly, the traditional process for changing the terms of an irrevocable trust has been rightfully onerous.

Unfortunately, it’s not entirely uncommon that the machine needs some retooling, let alone re-lubricating. Perhaps the laws have change significantly, and your original goals for your loved ones have proven unworkable or even detrimental to them. In a worst case scenario, the inheritance could become a curse rather than a blessing.

In short, to “decant” the trust is to work around those harsh legal and people conditions, realigning the trust to conform to the new environment. The decanting process involves pouring the assets from one vessel to another – from one trust to a new form of the trust or an entirely different trust. Like a fine wine, decanting breathes new life into the assets once held in a trust that no longer suits its purposes.

This is not a do-it-yourself project, however. It can prove to be complex rather quickly. In fact, at present, decanting is only possible in 18 states. Consequently, the laws of your state will determine whether the process is available, as it matters where your trust exists.

For more on decanting and more obligatory wine references, be sure to read the original article. This is information worthy of your consideration whether you are establishing your family trust now, are a trustee, or a beneficiary.