A revocable living trust is one of the most common estate planning tools, allowing grantors to maintain control over their assets during life while avoiding probate at death. A frequent question concerns what happens to the trust when the grantor dies. The short answer is yes: a revocable trust does automatically become irrevocable upon the death of the grantor, with the terms becoming fixed and the trust transforming into a separate legal entity. However, the details matter, particularly for joint trusts created by married couples.
Why Revocable Trusts Become Irrevocable
The defining characteristic of a revocable trust is that the grantor retains the power to amend, modify, or completely revoke the trust during their lifetime. The grantor can change beneficiaries, alter distribution terms, remove assets, or terminate the trust entirely. This flexibility is the primary advantage of revocable trusts for estate planning during life.
This power of revocation exists only because the grantor is alive to exercise it. When the grantor dies, there is no longer anyone with the authority to modify the trust terms. The power to revoke was personal to the grantor and does not transfer to anyone else unless the trust document specifically grants such authority to another person, which is rare.
The trust terms that existed at the moment of the grantor’s death become permanently fixed. Beneficiaries cannot be changed. Distribution provisions cannot be altered. The successor trustee must administer the trust exactly according to its written terms. The trust has effectively become irrevocable by operation of law and the absence of anyone with modification authority.
Legal and Tax Consequences of the Transition
When a revocable trust becomes irrevocable upon the grantor’s death, several important legal and tax consequences follow.
The trust becomes a separate taxpayer. During the grantor’s lifetime, a revocable trust is typically treated as a grantor trust for income tax purposes, meaning all trust income is reported on the grantor’s personal income tax return using the grantor’s Social Security number. After death, the trust needs its own Employer Identification Number and must file its own fiduciary income tax return, Form 1041. The trust may now be subject to trust income tax rates, which reach the highest marginal rates at relatively low income levels.
Trust assets receive a stepped-up basis. Assets held in a revocable trust at the grantor’s death generally receive a new cost basis equal to their fair market value as of the date of death. This eliminates built-in capital gains on appreciated assets, providing significant tax benefits to beneficiaries who subsequently sell the assets.
Creditor protection changes. During the grantor’s lifetime, assets in a revocable trust remain fully accessible to the grantor’s creditors because the grantor could access those assets at any time. After death, the trust may provide some protection from the beneficiaries’ creditors, depending on how the trust is structured and whether it includes spendthrift provisions.
The successor trustee’s duties begin. The person named as successor trustee in the trust document assumes responsibility for trust administration, including gathering and valuing assets, paying debts and expenses, filing tax returns, and distributing assets to beneficiaries according to the trust terms.
Joint Trusts and the First Spouse’s Death
The analysis becomes more complex when dealing with a joint revocable trust created by a married couple serving as co-grantors. What happens when one spouse dies but the other survives?
In most joint trust arrangements, the trust does not become fully irrevocable upon the first death. The surviving spouse typically retains the power to amend or revoke at least portions of the trust relating to their own assets and their share of community property or jointly owned assets.
However, the deceased spouse’s share of the trust assets often becomes irrevocable at the first death. Many joint trusts are designed to divide into separate subtrusts upon the first death, with one portion becoming irrevocable to preserve tax benefits or protect assets for the couple’s chosen beneficiaries.
The specific trust language controls this outcome. Some joint trusts provide that the surviving spouse can modify the entire trust. Others strictly limit the surviving spouse’s power to their own share. Still others require the surviving spouse to disclaim or elect certain provisions within a specified time period.
Estate planning attorneys draft joint trusts with different provisions based on the couple’s goals. A couple primarily concerned with flexibility for the survivor might allow broad modification powers. A couple concerned with ensuring assets ultimately pass to children from a prior marriage might restrict the survivor’s ability to change beneficiaries.
Subtrusts Created at Death
Many revocable trusts are designed to divide into multiple subtrusts upon the grantor’s death. Common subtrust structures include:
A survivor’s trust holding the surviving spouse’s separate property and share of community property, which typically remains revocable by the surviving spouse.
A marital trust or QTIP trust holding assets that qualify for the estate tax marital deduction. This trust is irrevocable, though the surviving spouse often has the right to income and, in some cases, principal distributions.
A bypass trust or credit shelter trust designed to use the deceased spouse’s estate tax exemption. This trust is irrevocable and may provide benefits to the surviving spouse and other family members without inclusion in the survivor’s taxable estate.
A family trust holding assets for the benefit of children or other beneficiaries, which is irrevocable from the moment of its creation at the grantor’s death.
Each of these subtrusts has its own terms, its own beneficiaries, and its own administrative requirements. The successor trustee must carefully follow the trust document to determine which subtrusts are created, how assets are allocated among them, and what distribution standards apply to each.
Incapacity and Revocable Trusts
While death is the most common event that transforms a revocable trust into something the grantor cannot change, incapacity can have similar effects.
If the grantor becomes incapacitated and lacks the mental capacity to make legal decisions, they lose the practical ability to modify or revoke the trust even though they are still alive. The trust remains technically revocable, but the grantor cannot exercise that power.
In this situation, a successor trustee steps in to manage the trust assets for the grantor’s benefit during the incapacity. The successor trustee typically does not have the power to modify the trust terms because the power of revocation is personal to the grantor.
If the grantor later regains capacity, they can resume control of the trust and exercise their modification powers. If the grantor dies while incapacitated, the trust becomes irrevocable at that point just as it would have if the grantor had been competent.
Trust Administration After the Grantor’s Death
Once a revocable trust becomes irrevocable, the successor trustee has specific responsibilities that must be carried out according to the trust terms and applicable state law.
The trustee must locate and secure all trust assets, obtaining current values for estate administration and potential estate tax reporting. Real estate, financial accounts, business interests, and personal property must all be identified and protected.
Beneficiaries must be notified of their interest in the trust. Most states require the trustee to provide beneficiaries with copies of relevant trust provisions and periodic accountings of trust activity.
Outstanding debts and expenses must be paid from trust assets. This includes the decedent’s final bills, funeral expenses, costs of trust administration, and any taxes owed.
Tax returns must be filed, including the grantor’s final personal income tax return, any required estate tax return, and ongoing fiduciary income tax returns for the trust.
Distribution of trust assets occurs according to the trust terms. Some trusts direct immediate distribution to beneficiaries. Others require the trustee to hold assets in continuing trusts for beneficiaries’ lifetimes or until they reach specified ages.
Can an Irrevocable Trust Be Modified?
Although a revocable trust becomes irrevocable upon the grantor’s death and generally cannot be changed, limited exceptions exist in certain circumstances.
Trust decanting is a process allowed in many states by which a trustee distributes assets from an existing trust to a new trust with different terms. The extent of permissible changes varies by state, and not all trusts can be decanted.
Judicial modification may be available if administering the trust according to its terms becomes impossible or would defeat the grantor’s intent due to circumstances the grantor could not have anticipated. Courts are generally reluctant to modify trust terms and require strong justification.
Beneficiary consent modifications are possible in some states if all beneficiaries agree to a change and the modification does not violate the grantor’s material purposes. This typically requires court approval.
These exceptions are narrow and should not be relied upon as substitutes for proper drafting of the original trust document.
Conclusion
A revocable trust does automatically become irrevocable upon the grantor’s death, fixing the trust terms and transforming the trust into a separate legal entity with its own tax obligations. For joint trusts, the deceased spouse’s share typically becomes irrevocable while the surviving spouse may retain some power over their own share. The specific trust language controls the outcome, making careful drafting essential.
For assistance with revocable trust planning or trust administration after a grantor’s death, consider consulting Mark Pierce and Matt Meuli at Wyoming Trust Attorney.