Trusts are one of the most versatile tools in estate planning, helping individuals and families safeguard their assets, avoid the time and expense of probate, and achieve their long-term financial goals.  If you’ve begun researching trusts, you’ve likely come across the two main types, broadly speaking: revocable and irrevocable trusts.  Each serves a distinct purpose and comes with its own set of benefits and limitations.  Let’s explore the differences under Tennessee law to help you make an informed decision.

A revocable trust is a trust that is created while you are alive and allows you to make changes easily at any time.  The majority of people benefit from this arrangement because of the flexibility it provides.  This is the type of trust that is best for most people while they are alive.  I will dig more into this in the section about revocable trusts below.

An irrevocable trust cannot typically be changed once it is created and may not be the best option for most people–but for certain people, an irrevocable trust can prove extremely useful.

 

Revocable Trusts are the Best Option for Most People

A revocable trust, often called a “living trust,” is designed to be flexible.  As the name suggests, it can be changed or completely cancelled by the trust maker at any time during their lifetime.  This makes it an attractive option for individuals and families who value control and adaptability and wish to avoid cost and delay for their family after their death.

Importantly, a revocable trust becomes irrevocable after you pass away.

With a revocable trust, you retain full control over the assets placed within it.  In fact, most trust makers (you) name themselves as the trustee, allowing them to manage their assets as they always have.  This structure also makes it easy to adjust the trust as circumstances change—whether it’s a new addition to the family, a significant financial shift, or the need to account for new estate planning goals.

For Tennessee families, a revocable trust is often the foundation of a well-crafted estate plan.  It allows for the simple and timely transfer of assets to heirs while avoiding probate, a benefit that saves time and money and ensures privacy.  However, it’s important to understand that while revocable trusts offer convenience and control, they do not provide asset protection.  Assets in a revocable trust remain accessible to creditors and are not shielded from lawsuits.  Additionally, they do not reduce estate or gift taxes although only a very small number of people are subject to estate taxes in Tennessee.

Most younger families who do not have a huge amount of assets, a revocable trust is almost always the best option.  It gives your estate plan the ability to evolve with you as their family and financial situation changes over time.

 

Irrevocable Trusts Provide More Protection, but Only for Specific People

Unlike their revocable counterparts, irrevocable trusts are designed to be permanent.  Once assets are transferred into an irrevocable trust, the trust maker (you) gives up significant control.  These trusts cannot typically be changed or cancelled.

While this might seem like a drawback, it comes with significant advantages also.

Irrevocable trusts are a powerful tool for asset protection.  Because the assets are no longer considered the property of the trust maker, they can be shielded from lawsuits, creditors, and even divorce settlements.  This feature makes them particularly appealing for individuals who want to preserve wealth for future generations or protect their assets in the face of financial risks.

Are you concerned about future nursing home care?  In Tennessee, irrevocable trusts are often used for Medicaid planning.  Medicaid eligibility requires individuals to meet strict income and asset limits, and placing assets in an irrevocable trust can help someone qualify for assistance while still preserving wealth and their home for their family.  Irrevocable trusts are also highly effective for high-net-worth individuals who want to reduce their taxable estate.  By removing assets from their estate by transferring ownership of them into an irrevocable trust they can minimize or even eliminate estate taxes.

 

Types of Irrevocable Trusts in Tennessee

There are several types of irrevocable trusts tailored to specific needs.  For example, Tennessee Investment Services Trusts (TIST) offer significant asset protection during one’s life for those willing to give up a large amount of control over certain assets.  Irrevocable life insurance trusts (ILITs) allow life insurance proceeds to be excluded from estate taxes.  An option for philanthropically minded individuals is the charitable remainder trust, which combines tax benefits with philanthropic giving.

While these options provide the trust maker with certain benefits during their life, other options are often created at death to provide protections for a trust maker’s children (young or adult).  These include general needs trusts, to protect their inheritance from things like divorce, lawsuits, or financial immaturity, and special needs trusts, which protect assets for beneficiaries with disabilities without jeopardizing their eligibility for government assistance.

I was once working with one of my clients designing his trust-based estate plan when he told me that he wanted to disinherit his oldest son.  This came at a bit of a shock to me because he had just spent the last 15 minutes telling me how much he loved his kids, including that son.  I could have left it there and moved on, removing his son from his plan entirely.  Instead I asked more questions and learned that his son was somewhat recently sober and my client was worried that giving him a large inheritance of free money would cause him to fall off the wagon.  He was overjoyed when we came up with a plan to give his oldest son his inheritance but to keep it inside of a general needs trust.  This meant that his son would have access to his inheritance for things that my client approved of, like health and education, but that someone else would oversee managing his inheritance and it could not be lost or squandered.  We even built in measures to incentivize continued sobriety.

While irrevocable trusts offer unparalleled benefits in terms of protection and tax efficiency, they require meticulous planning and a clear understanding of their implications.  Their benefits also come at the cost of flexibility and control

 

The Difference Between Revocable and Irrevocable is Flexibility and Protection

The most significant difference between these two types of trusts is flexibility and control.  A revocable trust allows the grantor to maintain control and make changes as life evolves, while an irrevocable trust locks in its terms, prioritizing protection and long-term planning over adaptability.  Another distinction lies in asset protection.  Revocable trusts leave assets exposed to creditors and lawsuits, whereas irrevocable trusts can provide a shield against these risks.  Additionally, irrevocable trusts offer tax advantages which are not available with revocable trusts alone.  Finally, for Medicaid planning for nursing home care, only irrevocable trusts can help protect your home from being taken after you pass away.

The decision to establish a revocable or irrevocable trust ultimately depends on your personal and financial goals.  A family with young children and a single primary residence might prefer a revocable trust for its simplicity and flexibility.  On the other hand, a high-net-worth individual concerned about taxes and asset protection may find an irrevocable trust to be the better option.  Often the answer is a combination of both.

When considering your options, think about your priorities.  Do you want to retain full control of your assets during your lifetime?  Are you concerned about protecting your wealth from creditors or ensuring eligibility for Medicaid in the future?  Discussing these questions with an estate planning attorney can guide you toward the right choice.

 

Need Help Deciding? Ask an Experienced Estate Planning Attorney

Trusts are highly customizable tools, but their effectiveness depends on careful design and adherence to Tennessee’s specific requirements.  This is especially true for irrevocable trusts, which require specific language and thoughtful planning to achieve their intended purpose.  An experienced estate planning attorney can help ensure that your trust is legally sound, tailored to your needs, and stays aligned with your goals long-term.  Without professional guidance, you risk costly mistakes that could jeopardize the effectiveness of your plan.

Choosing between a revocable and irrevocable trust is a significant decision that can have lasting implications for you and your family after you’re gone.  By understanding the unique benefits and limitations of each, you can make an informed decision that protects your family and provides you with peace of mind.  If you’re ready to take the next step, contact our offices and schedule a call with me by clicking the link below.