Common Law Trusts: Revocable Or Not?

Trusts are legal entities that allow a trustee to act on behalf of beneficiaries. Trusts are often used to protect assets from creditors and lawsuits, maintain privacy over financial arrangements, and benefit from certain tax advantages. There are two main types of trusts: statutory trusts and common-law trusts. Common-law trusts are formed based on judicial precedents and provide more flexibility but may lack the same legal protections as statutory trusts. Trusts can also be categorised as revocable or irrevocable. Revocable trusts can be altered or cancelled by the individual who created the trust, while irrevocable trusts cannot be changed. This article will explore whether a common-law trust can be revocable and provide insight into the unique characteristics and applications of this type of trust.

Revocable trusts are flexible

In the US, a trust is generally presumed to be irrevocable unless the instrument or will creating it states it is revocable. However, in Pennsylvania, California, Oklahoma, Texas, and any other state that has adopted section 602 of the Uniform Trust Code, trusts are presumed to be revocable unless stated otherwise.

Revocable trusts are also known as living trusts, as they allow an individual to use and protect their assets during their lifetime. They are often used to protect assets from creditors and lawsuits, to maintain privacy over financial arrangements after death, and to benefit from certain tax planning advantages. However, it is important to note that revocable trusts do not shield the grantor's assets from creditors or lawsuits, and the assets held in the trust are subject to state and federal estate taxes.

In contrast, an irrevocable trust cannot be changed except under extremely rare circumstances and with great effort. It offers stronger protection against creditors and lawsuits and removes the grantor's taxable estate assets, meaning they are not subject to estate tax upon death.

Irrevocable trusts are set in stone

Irrevocable trusts are legally binding and cannot be modified or terminated by the grantor once they have been signed. This is in contrast to revocable trusts, which can be altered or cancelled by the individual who created them. In rare circumstances, however, an irrevocable trust may be changed or terminated with the consent of all beneficiaries and/or a court order. A judge may be more inclined to make these changes if the purpose of the trust has already been fulfilled, has become illegal, or is defeated by compliance with the terms of the trust.

Irrevocable trusts are often used to minimise estate taxes, access government benefits, and protect assets. They are more complex than revocable trusts and may have current and future tax implications, so it is recommended that a tax or estate attorney is consulted before setting one up. They are also useful for individuals whose jobs put them at higher risk of a lawsuit, as the assets within them are protected from creditors, judgments, and divorce.

Testamentary trusts are irrevocable by design as they are created after the death of their creator and are funded from the deceased's estate according to the terms of their will. The only way to make changes to a testamentary trust or cancel it is to alter the will of the trust's creator before they die.

In the United States, a trust is generally presumed to be irrevocable unless the instrument or will creating it states that it is revocable. However, in Pennsylvania, California, Oklahoma, and Texas, trusts are presumed to be revocable unless stated otherwise.

Common law trusts are complex

The process of setting up a common law trust is more expensive and time-consuming than that of a statutory trust, which has standard terminology and templated documentation. Common law trusts are based on private contracts, linked to Article 1 Section 10 of the Constitution, which upholds the right to create private contracts.

Common law trusts are best suited to high-net-worth individuals and families who can afford a team of experts to manage the administration of the trust. They are a more advanced tool than statutory trusts and are often used when a statutory trust does not make sense due to state regulations or tax concerns. Common law trusts offer increased privacy and security, and they can be a good way to maintain and grow assets while protecting them from creditors and lawsuits.

There are several types of common law trusts, including revocable and irrevocable trusts. Revocable trusts can be altered or cancelled by the individual who created them and are often used to avoid probate court. In contrast, irrevocable trusts are set in stone once the agreement is signed, and they cannot be changed except in rare circumstances. Irrevocable trusts offer estate tax benefits and better protect assets from creditors and lawsuits.

Statutory trusts are popular

A revocable trust is a trust that can be altered or cancelled by the individual who created it. Revocable trusts are becoming increasingly common in the US as a substitute for a will, to minimise administrative costs associated with probate and to provide centralised administration of a person's final affairs after death.

Statutory trusts are also popular as they are separate legal entities, meaning beneficiaries and trustees are not personally liable for trust debts. They are also simple and inexpensive to form, and the application process includes a short-form application and a trust agreement. The laws governing statutory trusts are regularly updated, and consistent judicial decisions offer a sense of predictability.

Statutory trusts are also beneficial for estate planning as they provide a smooth transition of wealth with clear governance rules. They are also beneficial for investment funds and REITs as they are structured for compliance and tax efficiency.

Trusts offer privacy

Additionally, trusts can offer privacy by keeping assets off public records. This is achieved by transferring assets through a trust rather than through direct gifts or bequests. Trusts also provide privacy by shielding individuals from lawsuits and creditors. This is particularly useful for those with substantial assets who wish to protect their wealth. By forming a trust, individuals can create a barrier between themselves and potential legal or financial threats, ensuring that their assets remain protected and private.

Furthermore, trusts can provide privacy in tax planning. Different types of trusts, such as irrevocable trusts or spousal gift trusts, may have favourable tax treatments and can help individuals qualify for certain benefits, such as Medicaid. Trusts also allow for centralized administration of an individual's final affairs after their death, minimizing administrative costs and providing privacy for the distribution of assets.

It is important to note that while trusts offer enhanced privacy compared to other legal structures, they are still subject to certain legal and ethical codes. For example, strict ethical codes apply to the use of legal retainer trusts, where a lawyer holds funds in trust until legal services are provided. Overall, trusts provide a valuable tool for individuals seeking to maintain their privacy while also managing and protecting their assets.

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