Revocable vs. Irrevocable
Trusts can be classified according to a number of different criteria, one of which is revocability. A trust is revocable if the settlor has under the trust agreement retained the right, either unilaterally or with the consent of another party, to revoke the trust and reclaim the trust assets. Revocable trusts are typically also amendable by the settlor, even if not expressly stated to be so, for the obvious reason that the settlor could always revoke the trust and re-settle the trust assets into a different trust, so the settlor should be able to achieve the same result by just amending the first trust. An irrevocable trust is, not surprisingly, a trust that does not fit the definition of a revocable trust. Under New York’s Estates Powers and Trusts Law (EPTL), a trust that does not specify whether or not it is revocable is irrevocable. See NY CLS EPTL § 7-1.16. That said, to avoid doubt, every trust should expressly state whether it is revocable or irrevocable, which can be done fairly simply:
• “This trust agreement and the trusts created hereunder shall be irrevocable.”
• “The settlor reserves the right by an acknowledged instrument in writing to revoke or amend this trust agreement or any trust hereunder.”
Unless otherwise provided in the trust agreement, a revocable trust becomes irrevocable on the death of the settlor, though a revocable trust can still be revoked by a specific provision under the settlor’s Will. See NY CLS EPTL § 7-1.16.
Note that even if the trustee has discretion to distribute all of the trust’s assets back to the settlor, the trust would not thereby be classified as revocable. Revocability is determined by the settlor’s authority, not the potential for the settlor to receive the trust assets back based on a third party’s decision. Similarly, if the settlor has a reversionary interest in the trust, such that, for example, the assets of the trust would be distributed back to the settlor if he or she is living at the death of the beneficiary, that would have no impact on the classification of the trust as revocable or irrevocable because it does not implicate the settlor’s authority.
Though not legally required, the settlor is generally the sole beneficiary of a revocable trust during the settlor’s lifetime, and is often the sole trustee as well while he or she retains capacity. It may therefore seem that revocable trusts are not very substantial arrangements: if the settlor is the sole beneficiary as well as the sole trustee, and can take back the trust assets at will, what has the settlor really accomplished by transferring those assets to the trust? In fact, the trust laws of many offshore jurisdictions do not expressly contemplate revocable trusts for that very reason. And even in the United States, revocable trusts are typically treated as non-entities for creditors’ rights purposes and tax purposes. See, e.g., NY CLS EPTL § 7-3.1; 26 USCS § 676; 26 USCS § 2038. Nonetheless, revocable trusts play a key role in probate avoidance and incapacity planning, as will be discussed below in the section titled, Reasons for Creating a Trust.
Inter Vivos vs. Testamentary
Another criterion by which a trust can be classified is the instrument under which it is created. An inter vivos trust, as the name implies, is one created between living people; in other words, it is created via a separate agreement between a living settlor and the trustee. In contrast, a testamentary trust is one that is created under a decedent’s Will; there is no separate trust agreement but rather the terms of the Will itself govern the trust, so the Will is the trust instrument. An inter vivos trust can be revocable or irrevocable; a testamentary trust is always irrevocable.
Testamentary trusts in New York suffer from a particular disadvantage: New York is among only a handful of states that require trustees of testamentary trusts to obtain authorization—called Letters of Trusteeship—from the court supervising the administration of the decedent’s estate before they can serve as trustee. See NY CLS SCPA § 103(21); NY CLS SCPA § 701; NY CLS SCPA § 724. For the initial trustees of a testamentary trust, this is not a huge burden, because they can apply for Letters of Trusteeship as part of the same proceeding by which the Will is admitted to probate and the executors are granted Letters Testamentary. However, where a subsequent change in trustees of a testamentary trust is required, a separate proceeding must be brought in Surrogate’s Court for new Letters of Trusteeship, which is both time-consuming and relatively costly in terms of legal fees. Therefore, you should consider setting long-term trusts up as inter vivos trusts rather than as testamentary trusts.
It is worth noting that the Surrogate’s Court has jurisdiction over inter vivos trusts as well as testamentary trusts, see NY CLS SCPA § 207, but the requirement for Letters of Trusteeship does not apply to the former.
Personal vs. Other
Although not germane to this article, it is worth noting that there are other kinds of trusts besides personal trusts. There are corporate trusts such as pension plans and bond indentures. (Interestingly, the value of assets held in corporate trusts utterly dwarfs the value held in personal trusts, yet there is comparatively little law applicable to corporate trusts relative to personal trusts.) There are business trusts, which are entities created under the laws of certain states—such as Massachusetts, but not New York—that function more like corporations, with transferable shares. There are constructive trusts, which are remedies fashioned by courts of equity to prevent unjust enrichment. And there are resulting trusts, pursuant to which assets are held in trust by the recipient under circumstances where the transferor could not have intended the recipient to have beneficial ownership of them yet neglected to establish an express trust.