7 Questions on Irrevocable Trusts (Part 1 of 2)Aug 21, 2023
On one of my more popular YouTube videos, a subscriber asked 7 questions that were quite common and deserved a little more thought than just responding quickly in the comments. Here are the first four of the 7 questions, and the next blog will cover the remaining three. Check out the full YouTube videos through the links provided below.
1) Can a revocable trust be converted to an irrevocable trust?
For this to have a useful answers, we have to ask about the purpose of the trust. Revocable living trusts are meant to avoid probate so assets bypass the court system, and now that trust is set up to privately administer the estate and take care of the beneficiaries. The very typical revocable living trust is all about caring for you during incapacity and then for the beneficiaries after you are gone without court involvement. Can it be converted to an irrevocable trust? That's exactly what is supposed to happen after the person passes on. During life, a person can set up the revocable living trust and they can change it, amend it, revoke it, and do whatever they want with it. But when you pass on, it's now irrevocable.
the real heart of the question is can you convert a revocable trust to an irrevocable one during life, but why? The best way I look at it is if your revocable trust were a new BMW sedan, but now you want a BMW SUV because you need more space. Can you convert your sedan to an SUV? Yes, and it would take a ton of work because a sedan wasn’t built like an SUV. It would be easier to buy the SUV. The purpose of an irrevocable trust is often different enough that you're usually better off just setting up a new irrevocable trust to accomplish whatever goal you are trying to achieve.
2) Can a trustee change or sell property of the trust?
I've never seen a trust, revocable or irrevocable, where the trustee doesn't have at least some power, if not full power, to buy, sell, and change assets. That's really part of their job as trustee. If you have an irrevocable trust with you as beneficiary, then the investments are being put in place to fit your needs as an individual based on your circumstances and your age. When you pass on and the assets go to the next generation, even if it is held in trust, the trustee has to look out for their needs based on their situation and circumstances, which may be completely different. It's up to the trustee to adjust the investments to fit the needs of that beneficiary.
3) How do I make my kids in future generations unable to alter or sell anything in my trust after I pass?
You can prevent the terms of the trust from being changed after you pass on, and that is very typical. However, there are some big issues with trying to keep the assets from being changed or sold. There are still states that have something called the Rule Against Perpetuities. Essentially, you can't just put stuff into a trust and hoard it forever. If wealthy families were able to buy eighty percent of the land in their states, put it into a trust, and then say it could never, ever, ever be sold. That alone would cause an epic housing ownership crisis Essentially, the Rule Against Perpetuities says that you can only hold assets in trust the lifetime of everybody mentioned or referenced in the trust plus 21 years. There are some states that have done away or modified that rule, and North Carolina is one of modified rule change states. In North Carolina, you can have a trust set up in place forever as long as the trustee has the ability to buy and sell assets. You can’t keep the family home in trust forever or dictate certain investments have to be held in trust forever, but you can keep wealth generally in trust forever.
4) Can I put all my kids as trustees for an Irrevocable Family Trust?
As background, the Irrevocable Family Trust is typically used for Medicaid. You move the money and other liquid investments into the trust, and then you're walking away from the trust assets to start that five year clock for Medicaid. Can you make all of your kids co-trustees? You can, but, oh my gosh, don't do it, don’t do it, don’t do it. Bad idea. Really bad idea. It ends up being a management nightmare, and banks and other financial institutions end up compounding the paperwork and signatures needed when co-trustees are involved If you put co trustees in your trust, then it doesn't matter what provisions you put into the documents. For example, if you have three children and make them all co-trustees, then the financial institutions will generally insist that all three co trustees sign everything. But why, especially if you put in provisions that only one co-trustee’s signature is required? Because the financial institutions aren’t going to take on the liability that that one co-trustee was outvoted by the other two, but then that outvoted trustee went down to the firm first and started signing documents to take the action they wanted. They're going to insist that no matter what the trust says about the one signature provision that all three sign so they don’t get dragged into the lawsuit that is likely to come. So by insisting on three co-trustees, you've ended up tripling the paperwork required to get anything done.
Then what do my clients do if they want co-trustees in order to prevent animosity among the children by keeping everyone involved? That’s when I advise my clients to pick others who aren’t going to be dragged into the potential family drama, such as nieces and nephews or friends. With the irrevocable family trust, what you're talking about is putting the trustee in charge to the point they don’t have to use the assets for your benefit, and they have to be trusted enough to be allowed to give themselves the money and then turn around and pay for things for you. There's nothing in the trust mandating that they have to give the money to you.
Revocable vs Irrevocable Trusts: https://youtu.be/UWtYyt7UoWY
Seven Big Questions on Irrevocable Trusts: https://youtu.be/Ne0GVxBeeik
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