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Revocable vs. Irrevocable Land Trusts

by Randy Randy on June 26, 2010

There are many different types of trusts in use today and, as a result, there is a lot of confusion about how trusts work and what their tax consequences are. There are Simple Trusts, Complex Trusts, Revocable Trusts and Irrevocable Trusts (and many others). A Simple Trust is one that is a pass-through entity, such as a Grantor Trust. Typically, the Trustee, as a fiduciary, has the duty under the terms of the Declaration of Trust to hold, manage, invest and re-invest the trust estate, collect the income and profits from these activities and pay the necessary expenses of the trust administration. Where Simple trusts differ from Complex trusts is that the Trustee has the DUTY under the trust agreement to distribute its income and deductions to the beneficiary whether or not these are acually distributed (this technique can be used as a defensive mechanism against a creditor who gets an assignment of the beneficial interest as a satisfaction of debt).

The way in which different types and classification of trusts keep intertwining is almost incestuous. By virtue of the power of the settlor (the creator of the trust) to modifiy any of its terms any time he/she wants, any trust that is revocable can be:

1. A grantor trust
2. A simple trust
3. A complex trust
4. A living trust
5. A family trust
6. A common law trust
7. A land trust
8. A business trust
9. A medicaid trust
10A secular trust

And, in fact, every kind of trust EXCEPT an irrevocable trust.

A Revocable trust could contain provisions which would seem ironclad on the surface, but when the trust itself can be modified, amended, or revoked, these conditions are illusory at best. Still, they may make persuasive reading when one is not knowledgeable about trusts. Remember, Revocable trusts are not effective as asset protection devices, since, under court order, they can be revoked and all assets can be exposed to the claims of creditors.

What a person trades off between revocable and irrevocable trusts are flexibility in return for protection. In either case, a trust is effective in providing privacy, but a revocable trust is merely a curtain while an irrevocable trust acts more like a wall for tax and asset protection purposes.