When people hear ‘trusts,’ they often associate them with “trust funds,” but trusts go well beyond managing an inheritance for a child. Trusts can be an important part of estate planning and asset protection, especially for high-income earners such as physicians who are building significant wealth over the course of their careers. Trusts are also important because they help you control how your assets are distributed after (or even before) your passing, and ensure that you leave the legacy that you want for future generations. Two main types of trusts exist: revocable and irrevocable trusts. Both have advantages and disadvantages for doctors and fit unique roles as tools for estate planning. Below, we cover what they are, as well as the differences between a revocable trust vs irrevocable trust, to help you decide which fits your estate planning and asset protection goals.
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What Is a Trust?
A trust is a fiduciary relationship set up in which one party – the trustor or grantor – gives another party – the trustee – the right to hold title to property and/or assets for the benefit of a third party – the beneficiary. Doctors often use trusts in estate planning for managing assets and property that will be handed down to their children, grandchildren, or other beneficiaries such as charity organizations. Trusts are more complex than a standard will and can offer asset protection along with their benefits to estate planning.
While a trust establishes beneficiaries like a will, it does not establish guardianship. This is just one reason why having a will along with a trust is important.
Learn more about wills and estate planning for doctors.
While almost every physician needs a will, not every doctor needs a trust. Other asset protection strategies may be more beneficial and easier to manage along with a will at different stages during a physician’s life.
Learn more about asset protection strategies for doctors.
If you want a more complex and controlled transfer of assets to your beneficiaries, a trust can provide more control and say over when and how your assets are distributed. Assets in trusts also avoid probate, which means your beneficiaries can typically get access to the assets within a trust sooner and without the interference of the government, which can happen if you don’t have a will.
There are two main types of trusts–revocable trusts and irrevocable trusts.
What Is a Revocable Trust (Living Trust)?
A revocable trust is commonly referred to as a living trust or revocable living trust. A revocable trust is set up while you are still alive, and the terms that manage the trust can be changed at any time, including:
Adding a new beneficiary
Removing an existing beneficiary
Changing the terms of how assets are dispersed
Terminating the trust
With a revocable trust, you create a separate legal entity and retitle assets you currently own into the trust’s name. Once the assets are transferred into the revocable trust, any taxes generated by them during your lifetime will usually still flow through your personal return.
A variety of different assets can be held within a revocable trust, such as:
Artwork and other personal property
Bank accounts
Business interests
Investment accounts
Life insurance policies
Real estate
A living trust can exist as long as you’re alive. Once you pass or become incapacitated, a revocable trust can become an irrevocable trust, but it’s important to consult with an experienced physician estate planning attorney to ensure you understand the specific laws and regulations in your area.
Advantages of a Revocable Trust
There are several advantages to revocable trusts.
Flexible and changeable. Since the terms of a revocable trust can be changed at any time up until your death, you can make changes or amendments to it, offering flexibility if your estate planning goals change later on. You can even entirely dissolve the trust if desired.
This can be a great way to safeguard your wishes for your legacy and to help manage your assets, especially for younger children. For example, if you have a substantial estate and are worried about handing over the entirety of it to your minor children or while they’re still in college, you can set the terms of the trust distribution. You can even specify if certain assets can only be used for college expenses.
Retain full control of assets. When assets and property are moved into a revocable trust, you still retain full control over them. You can add or remove assets from a revocable trust after established. You will also retain full control over the income generated from assets held within the trust, such as rental real estate property. This is especially important if the passive income generated from these assets are part of your physician retirement planning.
Avoids probate and fees. While some assets outside of trusts can be required to go through a lengthy and at times expensive probate process before being released and distributed to your beneficiaries, a revocable trust allows your estate to avoid the probate process. Note, though, that this only applies to assets and properties transferred into the trust. It does not apply to any additional assets held outside the trust.
Protects your privacy. Doctors can be targets for malpractice cases and high-profile physician influencers can even become targets of public scrutiny. A revocable trust can offer privacy for your personal finances. Since probate is a public court proceeding, the details of your will and trust can become public record. By foregoing this process, you can keep your estate and information about your beneficiaries out of the public eye.
As assets transferred into a revocable trust will be retitled to the trust, having assets such as your primary residence and rental properties held within a revocable trust can also add an additional layer of privacy for personal information such as your legal address, especially in states with generous public records laws (though the trustee information for the estate can still be listed in public records).
Provides protection if incapacitated. Should you become incapacitated, a revocable trust allows your trustee, who you assign, to seamlessly take over the management of the assets within the trust without needing a court’s approval. This can ensure your assets are managed under the terms you have designed ahead of time.
Disadvantages of a Revocable Trust
Not protected from creditors or lawsuits. While assets within a revocable trust must be moved into the trust, the assets contained have little asset protection under the revocable trust umbrella. Though held within the trust, you still maintain control over them. While this can be an advantage, as noted above, it does not provide any asset protection.
Can be costly to set up and maintain. While you can get a simple will done as cheaply as a few hundred dollars, a revocable trust can be a few thousand dollars to set up. There can be fees associated with transferring assets into the revocable trust, and additional fees when making amendments or changes to a revocable trust.
Doesn’t offer tax benefits. Though assets must be transferred into a revocable trust to be included, they are still considered your assets for tax purposes. With a revocable trust, all income generated by these assets will still be taxed normally through your regular tax return. In addition, revocable trusts do not offer any tax advantages when it comes to estate taxes. The good news is that the federal estate and gift tax exemption amount as of 2024 was $13.61 million per individual (or $27.22 million for a married couple) and can often increase with annual adjustments, so this isn’t a concern for many physicians, even dual physician households.
Requires the re-tilting of property. Any property included in a revocable trust must be retitled into the trust’s name. Though this can provide advantages for privacy, this can also be a bit of a headache to initially setup and comes with a fee. In addition, if you later want to sell that property, such as a house or a vehicle, you would have to direct the trust to do so, as the trust will be the legal owner of the property at that time.
What Is an Irrevocable Trust?
An irrevocable trust is a type of trust that cannot be changed or dissolved once it has been established. Only under limited situations can an exemption be made, which typically requires either the agreement of all of the trust’s beneficiaries or by a court mandate.
With an irrevocable trust, all control over the assets included is relinquished to the trust. Thus, setting up an irrevocable trust is a much more permanent type of estate planning for doctors. Once assets are transferred into an irrevocable trust, they are removed from the grantor’s taxable estate. Like a revocable trust, many different types of assets can be included in an irrevocable trust.
Unlike a revocable trust, an irrevocable trust isn’t treated like a pass-through entity for tax purposes while the grantor is alive. Instead, an irrevocable trust is treated like a separate tax entity.
There are several different types of irrevocable trusts that fall under two main categories:
Living trusts - created and funded by the grantor during their lifetime
Testamentary trusts - created after the death of the individual and funded from their estate according to the terms of their will
Some commonly used ones for estate planning include:
Bypass trusts - used to protect property that would normally be transferred to a spouse upon death; the spouse can still receive income from or use the property, such as a house, but never owns the property
Charitable trusts - designed to make gifts to charitable organizations
QTIP trusts - qualified terminable interest property trusts postpone estate taxes until after the death of the surviving spouse
For tax purposes, an irrevocable trust can be treated as a simple, complex, or grantor trust, depending on how the powers are set up during formation.
There are several more types of irrevocable trusts and setting up any irrevocable trust can be complicated, so we highly recommend working with an estate planning attorney used to working with physicians when setting up your trust.
Advantages of an Irrevocable Trust
Offers protection from creditors and lawsuits. Since the assets within an irrevocable trust are completely transferred out of your ownership, they are no longer subject to your creditors or lawsuits. This can be a huge advantage for physicians, though we also recommend covering your basis first with proper insurance coverage including a personal umbrella policy and malpractice insurance with tail coverage. Certain tax-advantaged retirement accounts also offer some asset protection even outside of an irrevocable trust.
Avoids probate and fees. Like a revocable trust, irrevocable trusts allow your beneficiaries to skip the probate process, which can allow them to receive their inheritance faster and without costly legal fees for the probate court proceedings.
Provides tax benefits. When you transfer assets into an irrevocable trust, they become part of an entirely new tax entity. If you have a taxable brokerage account of stocks, bonds and mutual funds, any dividends and interest produced by those assets will no longer be taxable income on your individual tax return. Instead, that income and tax burden becomes the responsibility of the trust.
As mentioned above, these assets also no longer count toward the gifting limit or are subject to estate taxes, which has the potential to save your beneficiaries a significant amount of their inheritance in taxes if above gifting exemption limits. If your beneficiaries live in a state with an inheritance tax, an irrevocable trust can help avoid inheritance taxes as well.
Side note: Income taxes are handled and paid by a trust versus a beneficiary differently, depending on if the irrevocable trust is a grantor or a non-grantor trust. Consult with your estate planning attorney and/or tax professional when determining which type of trust you want to set up.
Protects doctors’ privacy. Like a revocable trust, assets moved into an irrevocable trust become the property of the trust and are no longer treated as property of the grantor. This can allow for more privacy of how assets held within the trust are treated, and remove your personal information from ownership records for these assets.
Disadvantages of an Irrevocable Trust
Terms cannot be changed and the trust cannot be undone. Except for the few strict exceptions noted above, once an irrevocable trust is established, all the assets transferred into it belong to the trust and the terms cannot be changed.
Relinquish control of assets. Everything held within an irrevocable trust becomes property of the trust alone. Since it no longer belongs to you, you lose all control over how to manage and run it. That duty becomes the responsibility of the trustee and is dictated by the ironclad terms the irrevocable trust was established under. While you can put your primary residence and rental property into an irrevocable trust, it can make it more difficult to move or sell that property, depending on the terms of the trust agreement. Make sure you work closely with an estate planning attorney and understand the full implications before moving assets and property into an irrevocable trust.
Expensive to set up and maintain. Irrevocable trusts are highly complex and require working with a professional to establish. As such, they can cost thousands of dollars to set up. In addition, they can require a trustee to run them that isn’t a beneficiary in the trust. Administrative requirements are more complicated, including tax filing requirements, which can add additional expenses, regardless of who foots the bill.
In addition, there is a chance the trust may be subject to higher income tax rates than individual tax rates, though physicians are usually subject to some of the higher marginal tax rates.
Requires the re-titling of property. Like with a revocable trust, any property moved into an irrevocable trust must be re-titled to reflect the ownership change.
Revocable vs. Irrevocable Trust: Which Is Better for Physicians?
When assessing a revocable versus irrevocable trust, both have benefits for estate planning, but they work better for different goals.
Doctors should consider a revocable trust if they want to maintain control and say of their assets during their lifetime, including the ability to dissolve the trust if desired. A revocable trust can make more sense for lower net worth physicians who aren’t as concerned about gifting tax limits on their estate.
Doctors should consider an irrevocable trust as part of an advanced tax planning and gifting strategy for their estate to help avoid estate and gifting tax burdens for their beneficiaries. This can be particularly advantageous for high net worth physicians who are planning on leaving a legacy behind greater than the estate tax exemption amount.
If you are at a substantially high risk for malpractice lawsuits, an irrevocable trust can be a way to help shelter assets as well.
If you are reaching the point in your estate planning where a will no longer offers enough protection and optimization, but you still aren’t sure if you should choose a revocable or irrevocable trust, reach out to a physician estate planning attorney to help guide you with your estate planning goals.
Conclusion
Revocable and irrevocable trusts add an additional layer of estate planning to your will and are important options for physicians to consider, depending on their personal finances and legacy planning goals. Revocable trusts allow you to retain control and ownership over your assets, as well as flexibility in how the trust is set up and managed. Irrevocable trusts are more one-and-done solutions that can provide tax benefits and asset protection. Each type of trust has its advantages for different goals.
Revocable trusts can be easier to establish, but both can be complex. We recommend working with a physician estate planning attorney to help discuss which will best suit your needs and to help make sure you set your trust up properly. If you don’t already have one, they can also help you set up your will and other legal documents such as power of attorneys at the same time.
Additional Estate Planning and Asset Protection Resources for Doctors
Regardless of whether you're new to estate planning and asset protection or have some protections in place but are looking to expand your strategy as your wealth grows, we have additional resources to help.
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