Revocable vs Irrevocable Trusts: What Adult Children Need to Know

Transcript of Interview: “Revocable vs Irrevocable Trusts: What Adult Children Need to Know”

Mike Barnes: I think a lot of us get into a situation where someone says, you know what? You need a trust, or your mom needs a trust, or your dad needs a trust.

And you go, okay, that sounds great. And then you realize there are lots of options out there.

Kim Barnes: Right. And what’s the difference? So today we’re gonna clear up any confusion. We’re gonna bring in Keith Leuty from Barnett and Leuty Law Firm to talk about the difference between an irrevocable and a revocable trust.

They sound pretty similar. Keith. Let’s talk about what the differences are.

Keith Leuty: Sure. Thanks for having me on. and you’re right, Mike. there’s probably a hundred different types of trust, but when we start helping people with estate planning, there are two that we, primarily focus on the revocable and irrevocable. And I tell people that the difference between the two.

Just think about if you were, if you went into your backyard and you pitched a tent. In the backyard with a canvas, right? that would be like a revocable trust. It’s something that you can move around, you can change, put reposition [00:01:00] however you need to as the circumstances dictate. An irrevocable trust would be like if you went in the backyard with brick and mortar and built a doghouse.

something that’s not supposed to change very easily. and, you’re really not probably gonna move it very much once it’s set in place. It’s, know, there for good.

Keith Leuty: good Yeah,

Mike Barnes: that makes sense. I like that. you always have great analogies for us and to understand it. Is it, easy to say, well, about half the people get irrevocable, but half the people get revocable? Does it really, is it easy to tell what you need and that how many people get ’em?

Keith Leuty: I think it’s pretty easy for us. It, Usually it becomes pretty apparent after we start talking to the families about their needs and where they are in life and positioning. I think probably our firm does more irrevocable on, on average, just because we do work with the senior population [00:02:00] and the irrevocable trust kind of tends to be in the direction that they’re headed in at that time.

But we certainly do a lot of revocable trusts as well.

Kim Barnes: So let’s start with the revocable trust. When is that a good option? Who’s a good candidate for that and kinda what’s the goal of a revocable trust?

Keith Leuty: revocable trusts are good for anybody who is trying to avoid the probate courts, to pass on assets. any, because anything that you put into a trust, I always tell people think about a trust, like a legal bucket, and whatever you put into that bucket will never have to go through the probate courts in front of a judge and, it can be passed very quickly.

Instead of having to wait for the probate process, which sometimes can take months to get from beginning to end. So we get people, of all ages who come in to get revocable trust when their goal is simply to stay out of probate court. [00:03:00] also it is, during a person’s lifetime if they become, incapacitated in some way and need somebody to take over their financial affairs.

We’ve talked in the past, in other interviews about the durable power of attorney, and, we certainly, that’s a very powerful tool for someone to manage your finances. But if you make them the backup, trustee of your revocable trust, they really can’t get any more power than that. So you, we see people who, whether it’s, two spouses who set up a revocable trust.

And they’re co-trustees. So if one of them could not, function in their normal way, the other one automatically could, kinda take the wheel, so to speak. and for people who are not married, a lot of times they will name children or [00:04:00] other family members to be able to step in seamlessly without really, it’s really hard to challenge when someone is the acting trustee of a revocable trust.

Mike Barnes: When I hear the term revocable, I picture my dad and he is gonna change his mind about something. Eh, I don’t think Mike deserves this and he’s gonna change his trust if he had one. And because it’s revocable, take me out and give everything to my sister. Am I misreading that or is that what revocable basically means that he can do whatever he wants?

Keith Leuty: Yeah, revocable means you, if you wanted to, you could come in every week and make changes based upon your life circumstances, as long as the person still has mental capacity to do so. we don’t see that very often. But yeah, technically you can, as long as you’re able and capable that it’s very flexible.

Kim Barnes: Okay.

Mike Barnes: So it, it

seems to me like if you’re, younger, if you’re in your thirties or forties, maybe if in your fifties. It’s good to have a [00:05:00] revocable ’cause so many things are changing in your life and different family members coming in and those type of things. But as your aging parents are getting older, maybe you want irrevocable instead of revocable.

Would that be the case?

Keith Leuty: Yeah, we probably see that more in our older population where we start getting into the, to the irrevocable with, with the revocable trusts. you were asking about if they could be changed and there is a, there is sort of a hybrid, that we will, ask our clients when they set up a revocable trust, how do they want it to be when they pass away?

Do, especially if you have, like two spouses are co-trustees and. Every case is different, but I’m gonna generalize just a little bit here. if I have a married couple and they’ve been together for 50 years or 40 years, or however long, and all of their children [00:06:00] are, you know, from both of them, many times they will leave that as a revocable trust throughout, the duration of the trust because one of them passes away.

They want the other spouse to be flexible. Maybe one of the children does go rogue and, and maybe they wanna leave them less, or maybe one of the children, I don’t know, wins the lottery and they don’t need the money as much. So you have it flexible. We also have the option with a revocable trust of saying when the first spouse dies, this trust will now become irrevocable.

It locks in. And where we see that the most is like in second marriages where both, of the individuals have, adult children and they want to ensure that, Hey, you know, my kids here are supposed to get a certain portion of this trust, and if I die first. I don’t want my spouse to suddenly decide, well, [00:07:00] my kids get nothing.

So we can, it can lock in and turn into irrevocable upon the death of somebody.

Kim Barnes: Interesting. And that would also potentially be the same situation if, a couple has a revocable trust that when both of them pass, it could either stay revocable as it’s passed down to the heirs or become irrevocable.

Keith Leuty: it, it should become

irrevocable when the grantors, the two who created it, when they pass away, it becomes irrevocable. And the successor trustee, the person now sitting in that seat really doesn’t have the option to suddenly change and say, well, I think I’m gonna cut out my siblings. so that’s when it locks in as irrevocable.

Kim Barnes: Oh, interesting. Okay. So then once that is passed on to who, if there are two heirs or three heirs or four or whatever, then they could then potentially decide what they [00:08:00] wanna do with their, Portion. I guess maybe that’s getting too complicated, but that’s where I was thinking of, so that makes sense that it becomes irrevocable.

So it definitely, carries out the wishes of the intent of that, that as that trust was created. And then once each person gets their part, it, they could decide to make it an irrevocable trust too, or is that just getting too confusing or is that why you need an attorney?

Keith Leuty: so yeah, once each person gets their portion, the trust should be closed. the bucket should be empty. And then if brother and sister want to, you know, donate or, gift part of their gift over to their sibling, that’s has nothing to do with the trust. That’s just a personal transaction.

Kim Barnes: Got it. I love that analogy. The bucket’s empty. That’s good. So that’s, as you say, that once, once you’re dispersing everything that’s in the bucket, then that trust is sort of null and void, if you will. Yeah. Okay. it. Okay. But

Mike Barnes: let’s talk about the bucket. If Medicaid is involved, because we’ve [00:09:00] talked a lot in the past about you might need a trust.

Well, what type of trust do you need there?

Keith Leuty: Yeah, that’s where the irrevocable trust, where we primarily see it. And when I tell people an irrevocable trust, I, used the analogy before about the, brick wall. here’s another analogy to think about the difference between revocable and irrevocable. If you go out and you buy a new sports car and both of you have keys to it, either one of you can drive it, that it would be like a revocable trust.

If instead, you guys go out and you buy a limousine, neither one of you is gonna be the driver. You’re gonna pick a driver. It can’t be you’re, too busy sitting in the back of the limousine. That’s the Medicaid trust. Okay? so if you set up an irrevocable trust for purposes of Medicaid, there are essentially two or two or three people on planet Earth who cannot be the trustee.

obviously the [00:10:00] attorney who drafts it, conflict of interest, and then, both yourself and, potentially your spouse. Cannot be the driver, cannot be the trustee. So you have to pick somebody. And I get asked all the time, who’s appropriate to be the trustee, to be the driver of this? And I say, well, who do you trust the most in this world?

Who do you rely upon? Who, has good financial judgment and also listens to you? and will do pretty much, you know, what needs to be done without having to be told. And so. The, irrevocable trust, the Medicaid trust, it’s a different breed and we use it for a different purpose. For, for Medicaid, I know we’ve done shows on Medicaid, and it could get really deep in there, but essentially when you’re preparing for Medicaid, there is a shift in your finances that needs to happen.

in order to qualify for Medicaid benefits [00:11:00] and the irrevocable trust, the Medicaid trust is the tool often that we can use to make that happen.

Kim Barnes: Okay, so that’s one. One very common use case for an irrevocable trust. Are there other cases where somebody would want an irrevocable trust? Or like, I mean, I guess you gave the example of if you want it to turn into one, but when you’re actually creating it would there be a case where you’d want an irrevocable?

Keith Leuty: Yeah, the, another type of irrevocable trust is something called a supplemental needs trust that, people who may have, children with special needs. you know, the child is 40 and the parents are now turning 65 and facing, you know, a future, starting to plan for what happens to our child if we are no longer, you know, here to look after them.

And you can set up one type of an irrevocable trust, is called a supplemental needs [00:12:00] trust. Some people call it a special needs trust and you put money into it and. The money is used to enhance or enrich the, child’s life for the remainder of their life, and, but it does not qualify them for the government benefits.

That they’ve, they probably already are receiving. And, whether to use a supplemental needs trust or a Medicaid trust in that circumstance is, you know, case specific. But with a supplemental needs trust, there are, special guidelines on what the money cannot be spent on, and that’s not true with the Medicaid trust.

So, yeah.

Kim Barnes: Okay.

Mike Barnes: Well, it sounds like if we want to trust, have to go through an attorney to, to basically to get it and let them ask the questions so that, you know, you do it the right way, whether it’s revocable, irrevocable. Who’s gonna be the, person in charge of it, who’s gonna be driving it?

Kim Barnes: Or is it [00:13:00] gonna be

Mike Barnes: revocable? Right. Because, we all have different situations, different financial, medical, relationship, family situations, and you and other attorneys are the ones who are gonna be able to figure that out and put the puzzle together to figure out what’s best.

Yeah.

Keith Leuty: correct.

Kim Barnes: yeah. Is there anything that we’ve, I mean, obviously there’s a lot more to this conversation than what we can have today, but are there any other main points that you’d want people to know about, you know, choosing between an irrevocable and a revocable trust?

Keith Leuty: A lot of times it has to do with giving up control. that, that idea of sitting in the back seat of the limo and letting someone else drive. we run into that many times. We’re working with seniors who have done their own finances for, you know, how many decades. And that can be something that’s a little bit difficult for them to give up.

And I understand that. And so sometimes they will go with the revocable trust where they are still the ones holding onto the steering wheel for now. but the thing to know is [00:14:00] that a revocable trust doesn’t position you for Medicaid, at all. An irrevocable trust does. the sooner you do the irrevocable trust, the better chance we have of preserving, You know, more assets for you, and get you qualified for Medicaid. the re again, the revocable trust, doesn’t help with that at all. It just keeps you out of probate court. And if you, if you want one final analogy that I use on revocable versus irrevocable trust, the way that Medicaid looks at it.

Medicaid says you can’t have very much money in your name. When they ask the question, how much money do you have to qualify? The revocable trust is like a piggy bank that you create and you set it on your nightstand and it is, right there within your reach and you control it. And if Medicaid knocks on the door and says, how much money do you have?

Well, they’re gonna count the money that’s in that piggy bank, right. [00:15:00] The irrevocable trust is a piggy bank that you fill up with money and then you give it to someone else, presumably, you know, maybe your favorite child or brother, sister, friend, whoever it may be. And they keep that piggy bank at their house.

They’re the ones under control. So if Medicaid knocks on the door and says, how much money do you have, they are not counting the money in that piggy bank because it’s not in your possession.

Kim Barnes: Okay. That’s a good, yeah, makes sense, doesn’t it? That’s a good, yeah, that’s a good analogy. Yeah. Yeah. I love the way you can make it visual so that it helps make it a little more, less confusing.

Mike Barnes: and the best thing to me though, what you said is that if you’re worried about your pa, your aging parents driving their finances, that’s when you may want irrevocable.

Kim Barnes: Or you’re worried about them getting scammed. Yeah. Or things like that where might somebody might take advantage of them.

Mike Barnes: Exactly.

Kim Barnes: And if it’s a revocable one, it would be easier for them to be taken advantage of.

Keith Leuty: absolutely.

Kim Barnes: Yeah.

Yeah. Okay.

Yeah.

And with an irrevocable one there, because it sounds like irrevocable means no, you can’t [00:16:00] touch it.

Are there ways that if something needed to be changed, it could be changed? It’s just not as easy.

Keith Leuty: Well, of course. so there, there’s really two ways that you could, if you absolutely had to change an irrevocable trust, the easiest way is to get all of the beneficiaries to agree. let’s just go in a scenario where it’s a, person who sets it up and the children are the beneficiaries.

The person who sets it up, the grantor can’t change an irrevocable trust. But if all of the children who are beneficiaries sign off and agree, then we can make a change. That’s the easiest way. the other way, and changing an irrevocable trust, by the way, is, I use the brick wall analogy earlier on because I frequently tell people.

Brick wall is meant to stay put, but if you get a sledgehammer, you can knock it down. It’s gonna be messy, right? But it can come down. [00:17:00] And so think about that with an irrevocable trust when you’re setting it up, set it up with the intention that it’s not gonna be torn down. But the other way to create or to change an irrevocable trust, remember it’s a bucket.

And if a person came to us and said, look, I’m the grantor and I’m still of sound mind. What I’m gonna do is create a second bucket. I’m gonna create a second irrevocable trust, and then have my trustee pour most of the contents of bucket number one into bucket number two, leaving only a few drops in bucket number one.

Mike Barnes: Oh wow.

Keith Leuty: Because under the terms that the, you know, that were not acceptable anymore, well, you’ve only got a few drops of water in that bucket, so who cares? The majority of the water is in the new bucket that you’ve created with the rules that you like.

Kim Barnes: Okay. And would that have to also be an irrevocable trust or could it be a revocable trust? The, second one.[00:18:00]

Keith Leuty: Technically it could be a revocable trust, but I think realistically, if we were doing an irrevocable trust, then the person is probably getting positioned for Medicaid and we would probably suggest sticking with irrevocable

Kim Barnes: Got it. Okay. And again, makes sense. Obviously there’s lots of scenarios, so, right. Yeah.

Mike Barnes: And there’s so many variables,

Kim Barnes: right? Yes.

Mike Barnes: So that’s the biggest thing to remember. But Keith, you have cleared everything up so much as usual. Thank you so much for your great information and your great analogies.

Kim Barnes: Yeah, thank you.

Keith Leuty: My pleasure. Thanks for having me.

Kim Barnes: Yeah. Great reminder that while this scenario makes perfect sense Then it in this situation, but it might not in another. Yeah. You really do need to have this hopefully helps educate people to know the terms and the questions to ask. Yeah. So that when you go do meet with an attorney, you can. Ask the right questions exactly and help make best decision.

Mike Barnes: Find a great decision, find a great attorney like Keith. Tell ’em the situation and then figure out what the best puzzle pieces are.

Kim Barnes: Right

Mike Barnes: to fit it all together and figure out what you need. Hey, if you have any other topics you’d like us to discuss, please let us know. Parenting aging parents.

*This transcript is auto-generated. Please excuse any typos or mistakes.