What are the differences between a revocable and irrevocable trust?

Ralph
00:00:00

Are you lying awake at night, worrying about what will happen to your hard-earned assets after you're gone? Do you fear that your wishes might not be carried out, or that your loved ones might face a legal nightmare?

Well, stick around, because today we're diving deep into a topic that could give you peace of mind, but more importantly than that, it can protect your legacy. We're going to answer the question: What are the differences between a revocable and an irrevocable trust?

Narrator
00:00:28

Welcome to the Ask Ralph podcast, where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting. Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all things financial.

Now here's your host, Ralph Estep Jr.

Ralph
00:00:58

Let's talk about what we covered on yesterday's show. Yesterday, we covered the 9 signs that show you're financially secure. So if you missed it, I'm going to encourage you to check it out because it can really give you some peace of mind or may just give you some practical insights that could change your financial outlook. So as we always start the show, we talk about a listener question.

This one came from Brittany. And it really struck a chord to me. And this is what she wrote. Says, "Ralph, I'm at my wit's end. My husband and I have worked hard all our lives to build our small business and provide for our family. But now, as we're getting older, we're terrified about what might happen to everything we've built. We've heard about trusts, but we're so confused about which type would be the best for us. The thought of making the wrong choice and potentially losing control of our assets or facing huge tax bills is keeping me up at night. Can you please help us understand the difference between a revocable and an irrevocable trust? We're desperate for guidance."

Well listen Brittany, I hear your concerns and you're not alone in those concerns. The truth of this, even me, many of us struggle with this. There's so much fear and uncertainty when it comes to dealing with these things. And remember this, the whole point of the Ask Ralph show is to answer your questions.

So just like Brittany, if you've got a question you want me to answer, go to justaskralph.com and send it in. And who knows? You might be on the show. I also want to remind you, before we dive into today's episode, I'd like to take a moment to share something personal with you. My mother-in-law, Dianne Bethard, is currently battling the late stages of Alzheimer's disease.

And in light of this, I've assembled a team representing the Ask Ralph show to participate in the upcoming Alzheimer's walk in Wilmington, Delaware. If you're interested in making a contribution, no matter what size it is, every contribution brings us one step closer to defeating this devastating illness. Your support means the world to us and to the millions affected by Alzheimer's because the truth is together, we can make a difference.

Well you know Brittany, when I'm thinking about your question today, I think about trust and estate planning, I'm reminded of a powerful verse that speaks to the importance of why stewardship and more important than that planning for the future. From the book of Proverbs 13:22. And it reads this. "A good person leaves an inheritance for their children's children, but a sinner's wealth is stored up for the righteous." That'll cut you because truth is, as Christians, we're called to be good stewards. And what this verse is telling us is not only for our current generation, but for generations to come. So we've got to have a mindset of financial view of how are we going to do that?

Now let me start by clearly stating. I am not an attorney. I am not giving you any legal advice. I'm going to strongly encourage you to discuss anything we talk about in the show today with your lawyer before making any decisions. I want to make that abundantly clear. This is an area that if you're going to implement one of these trusts, whether it be revocable or irrevocable, you need to find an attorney and have them work on it.

I just want to talk about some basic ideas today because the truth is understanding the difference between revocable and irrevocable trust can be the key to ensuring your legacy and providing for your loved ones. Let me tell you about my client, Dave. Now Dave's a successful small business owner.

He built his company from the ground up. I mean, Dave worked tirelessly for decades, but now he's approaching retirement, and he's got this nagging worry about what will happen to everything he's built. One day, Dave came in to see me. He says Ralph, he says, “I want to make sure my kids are taken care of. But I also want to keep control of my assets while I'm alive.

What should I do?” And see, for Dave, it was all about making sure his family was taken care of. But he also didn't want to give up control. And I said to him, I said, Dave, here's one of the things you might consider. And that's the beauty of a revocable trust. So let's get into the weeds a little bit. A revocable trust also known as a living trust can be the perfect solution for him.

And let me tell you why. So this revocable trust is a financial safety net. And you can adjust it over time. That's why it's called revocable or some people you might hear call grantor. And you can modify it or even dissolve it. It's what we call adaptable. And the best part for Dave and for anybody else looking at this is you maintain complete control over the assets in the trust during your entire lifetime. Now the other thing you asked about in your question, Brittany, was how does that contrast with the irrevocable trust?

So think about it like this. An irrevocable trust is like sending your assets on a one-way trip. You're giving all those things as a gift to the trust and once you do that, you can't change your mind. You can't take back control. It's permanent. It's like a permanent magic marker. Now, the truth is, this is really a great tax strategy, but it's really a less flexible path and this is a huge decision to make.

And we'll unwind that a little bit. So you might be asking, Ralph, why did you recommend a revocable trust for Dave? Let me tell you how this played out. So Dave decided, he went and met with his attorney, he created this revocable trust, and he started transferring most of his assets into it.

You know, his home, his business, his retirement account. And in his case, he named himself as a trustee. That meant he had full control over this. He could buy things, he could sell things, he could use his assets just like before, it was just this thing behind it. And the best part of this thing, the trust specified how his assets should be distributed after his death.

That's kind of the whole point. And the whole point, the end goal of that was he was avoiding the costly and time-consuming probate process because everything transfers outside of probate based on whatever those things are in trust. Now here's where it got interesting. A few years later, Dave's daughter graduated from college, and she decided she wanted to start her own business. And of course daddy wanted to help her out. And he had that revocable trust, so David went with his attorney, and he was able to modify that trust, and he was able to give his daughter some startup capital for her venture. Unfortunately, not too long after that, Dave's wife passed away. But because he had the flexibility of that revocable trust, he was able to adjust his estate plan to reflect those new circumstances.

It wasn't easy. It was a tough time emotionally and spiritually, but because he had that revocable trust, it was easy to make those changes. So what's the moral of Dave's story? It's pretty simple. Life is unpredictable. It's just the way it is. We live in a world that's constantly changing. What is true today might not be true tomorrow. And a revocable trust gives you the flexibility to adapt to those changes.

Now you might be wondering, Ralph, listen dude, it sounds like you're talking about these revocable trust are the best thing in, the best thing since sliced bread. They're so great. So you might be asking though, Ralph, dude, why would anybody choose irrevocable trust? These things timing up and not sometimes these words, but, and that's really a great question. The question is this.

If revocable trusts are so great, why would anyone choose an irrevocable trust? And the truth is they have their place. If you're looking for specific tax planning for high net income individuals, or you're looking to protect those assets, because think about it. You transfer those assets out of your personal purview. If they go into that irrevocable trust, you are giving up ownership of those assets.

So again, I'm not an attorney, I'm not going to give you legal advice, but if someone sues you, then technically you don't own those assets. It also is a way to reduce estate taxes and it's a way for high-net-worth individuals to protect those assets from creditors. That's exactly what we're talking about because truth be told those assets are no longer yours, they are assets of the trust.

But here's the truth. And this is the honest to God truth. For most folks like Dave and Brittany who wrote in, a revocable trust is often the best choice. And what does it do? Again, I think I've tarped on this for a few minutes now, but it avoids probate, it maintains privacy, and the biggest thing, it helps you control your assets.

Well now, let me talk about what my wife and I did. We did this exact same thing. We sat and we met with our attorney. We are doing our estate plan. We've made changes to it throughout the years as I've gotten older. My kids are now 23 and 27.

My oldest son is now married. Those things are changing. So we looked at our financial situation. We looked at our goals and our attorney said, listen, I think a revocable trust is really the best fit for you and Jennifer. Jennifer's my wife. And he said to us, he said, Ralph, it's going to give you peace of mind knowing that when you pass away, all your wishes are going to be carried out and the best part, like he said, it will allow you the flexibility to make those changes as life circumstances evolve.

So if one of my kids has a grandchild or something like that, we can do something with that. If one of my kids wants to go after a business venture and we want to loan them money, we can do that. So let's talk about taxes. We've kind of beat around the bush here. But with a revocable trust, there's really no immediate tax consequences. Affectively, the trust is created. But none of the assets are actually moved to that trust. So it's just like you had those bank accounts or those investment accounts or whatever those things are.

You're going to report them on your own personal tax return. Now here's the deal. If we take things and move them to that irrevocable trust, there could be some tax benefits because the assets are no longer part of your taxable estate. So if you're a really high net income individual, and you want to pick some of your assets and push them into this state, you can potentially reduce that estate tax burden. But here's the thing. You got to remember. You're giving up control of those assets.

So let's say, for example, you created one that's irrevocable trust. You transfer all the assets in, and you name your child as your trustee. Well, then I trust that he can make whatever decisions they want. And I say too bad for you, dad. So here's what I'm going to come back to.

So Brittany and anyone else grappling with this decision, I want to give you some key takeaways. We could talk about a lot of things, but I want to narrow it down for you. Number 1. If maintaining control of your assets is important to you, a revocable trust is likely your best bet, because then you're not giving up control of those. I remember when we met with the attorney, my wife, and I said, “Hey, if something happens six months from now, what do we do?”

He says, “Ralph, give me a call. We'll change the documents.” It's really that simple. Number 2. If you're worried about estate taxes and are willing to give up control of those assets, an irrevocable trust might be worth considering. So now we always talk about sometimes it just depends. And that's why you've got to talk to a legal expert.

So that's my number 3 thing on the list. Remember, trust are complex legal tools. You always need to consult with a qualified attorney and a financial advisor. That's where I can work with your attorney, and we can make a joint decision. Number 4. You got to consider your current circumstances, but you also have to think about those potential future changes in your life. Are you going to have children?

Are you going to have grandchildren? Are you going to buy a business? All these things can make a huge impact on how you set up these things. These trust, whether it's revocable irrevocable. But here's the last thing I'm going to say. Don't let fear paralyze you. You could be fearful. Oh, what should I do?

Like Brittany has alluded to that. She's like, we've worked hard for everything we have, but I just don't know what I'm going to do. Because see, here's the deal. Taking action, even if it's just starting a conversation with a professional, you're taking a step in the right direction. I say this on the show all the time.

You can have the best intentions. You can have the best ideas, but they are useless until you put them into action. So let's do a quick recap. I know I covered a lot today, but really the key differences between a revocable, irrevocable trust. As we said, the revocable trust, just think about these things.

Flexibility. My client, Dave, uses it, my wife and I use it and we choose this option for our own estate planning. It's the right choice. Based on your individual circumstances and goals, again, speak to your attorney. While I'm talking about that, I did a show with my attorney on January 30th of this year. And I'll put a link to that interview in the show notes.

So I'm going to encourage you to go check it out. Now tomorrow, I'm going to do a show on how do I effectively embrace God's gift of rest and I'm tired so I could use a rest. And I'm sure you could too. So you don't want to miss it. Now I know that navigating the world of trust and estate planning can be overwhelming.

You're probably thinking Ralph, you are talking in circles to me. But the truth is the fear of making the wrong choice of potentially jeopardizing your family's financial future is real. It's real. But here's the deal. You don't have to face this alone. If you're feeling stuck, if you're feeling unsure, or just need some guidance, I want to help you. I'm offering personalized consultations to help you make sense of your financial situation and we can create a plan that aligns with your goals and your values. For just $150, we can dive deep into your specific circumstances and develop a tailored strategy to meet your needs.

And here's the best part. If we can't create a personalized plan to move you forward, I'll refund your consultation fee. That's how confident I am that we can make a difference together. And maybe you're saying Ralph, dude, I'm feeling overwhelmed by my financial situation in general. Or maybe you're saying Ralph, I just want to make sure I'm on the right track.

I'd love to help you. I can work with you. This is what I do for a living. This is my mission field. Maybe you're saying, Ralph, I feel like I'm living paycheck to paycheck. Well I can help you move beyond that. Maybe you're saying Ralph, I feel like I'm taking three steps forward only to get shoved four steps back. What you're really looking for, you're looking to break that financial bondage and achieve financial freedom. Maybe it's to improve your personal finances or maybe you're thinking Ralph, dude, my personal finances are fantastic. But my business has struggled. My business needs to be better organized. I got to get my records in order. I'm looking for ways to grow my business.

I deal with this every day. And I can help you achieve all of those financial goals. It starts by creating a personal plan just for you. Not boiler plate in a cookie cutter stuff, do this and do that. And be a tax tiger by watching YouTube or any of those other online sites. I create a personalized plan with the goal to exceed your expectations. So to schedule that consultation, just head over to askralph.com. When you do that, you'll see a banner ad that says, "Book a call with Ralph" it's really that simple. Don't let another day go by feeling uncertain about your financial future.

There's no reason to feel uncertain. Let's work together to achieve your financial goals. As I said, maybe it's to grow your business if you have one and align your finances with your faith. Remember this. My passion and you hear it in my voice, this is what I do. I turn the microphone on. I turn the camera on. I put together these daily episodes because my passion is to help you achieve financial success. I want to see you live out your dreams and at the same time, I want to see you grow in your faith.

And I know working together, we can master your finances from a Christian perspective. So as I always end the show, stay financially savvy, find those people to work with you. You don't have to go this alone, and God bless you.

Narrator
00:16:06

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And remember, financial issues don't have to be complicated, Just Ask Ralph. The information contained in this episode of Ask Ralph is based on data available as of the date of its release.

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