What is a revocable vs. irrevocable trust?

Understanding the Difference Between Revocable and Irrevocable Trusts

Imagine you’ve worked hard to build your wealth and want to ensure it’s protected and distributed according to your wishes. You’ve heard about trusts as an estate planning tool, but now you’re faced with a decision: Should you set up a revocable trust or an irrevocable trust?

Both options have distinct advantages, but choosing the right one depends on your financial goals, tax planning needs, and level of control. Let’s break it down.

What Is a Trust?

A trust is a legal entity that holds and manages assets on behalf of beneficiaries. It allows individuals to control how their estate is handled both during their lifetime and after their passing. Trusts are often used to minimize estate taxes, avoid probate, and protect assets from creditors.

There are two primary types of trusts: revocable and irrevocable. The key difference? Flexibility versus permanence.

What Is a Revocable Trust?

A revocable trust—often called a living trust—allows the grantor (the person creating the trust) to maintain control over their assets. They can modify, amend, or even dissolve the trust at any time while they are alive.

Key Features of a Revocable Trust:

• The grantor can change or revoke the trust anytime.
• Assets in the trust bypass probate, allowing for a smoother transfer to heirs.
• The trust remains part of the grantor’s taxable estate (no tax benefits during their lifetime).
• It does not provide asset protection from creditors or lawsuits.

Advantages of a Revocable Trust:

✅ Avoids Probate: Since the trust owns the assets, they don’t have to go through probate when the grantor dies.

✅ Maintains Privacy: Unlike a will, which becomes public record in probate, a trust remains private.

✅ Allows for Incapacity Planning: If the grantor becomes incapacitated, the successor trustee can manage the trust without court intervention.

Disadvantages of a Revocable Trust:

❌ No Asset Protection: Since the grantor retains control, creditors and lawsuits can still claim assets in the trust.

❌ No Tax Benefits: Assets in a revocable trust remain part of the grantor’s taxable estate.

What Is an Irrevocable Trust?

An irrevocable trust, as the name suggests, cannot be changed or revoked after it is established (with rare exceptions). Once assets are placed in an irrevocable trust, they are no longer considered the grantor’s property.

Key Features of an Irrevocable Trust:

• The grantor gives up ownership and control of assets.
• Assets are protected from creditors and lawsuits.
• May provide tax benefits by reducing the taxable estate.
• Can be structured to provide for special needs beneficiaries or charitable donations.

Advantages of an Irrevocable Trust:

✅ Asset Protection: Since the assets no longer belong to the grantor, they are shielded from creditors and legal judgments.

✅ Tax Benefits: Reducing the taxable estate can lower estate taxes, and some trusts provide income tax advantages.

✅ Medicaid Planning: Irrevocable trusts can help individuals qualify for Medicaid by removing assets from their name.

Disadvantages of an Irrevocable Trust:

❌ Loss of Control: The grantor cannot make changes or take assets back once placed in the trust.

❌ Complex Setup and Management: Requires legal expertise and ongoing trustee oversight.

Key Differences at a Glance

Which Trust Is Right for You?

• Choose a Revocable Trust if: You want flexibility, control, and an easy way to avoid probate.
• Choose an Irrevocable Trust if: You need asset protection, tax savings, or Medicaid planning.

How to Set Up a Trust

If you’re considering a trust, follow these steps:

1. Define Your Goals: Do you want to avoid probate, protect assets, or reduce estate taxes?
2. Consult an Estate Planning Attorney: Trust laws vary by state, and professional guidance ensures your trust is structured correctly.
3. Choose a Trustee: Pick someone trustworthy to manage the trust after your passing.
4. Transfer Assets to the Trust: Ensure real estate, financial accounts, and other assets are legally moved into the trust’s name.
5. Review Regularly: Estate laws change, and your trust should be updated as needed.

FAQ About Revocable and Irrevocable Trusts

1. Can a revocable trust become irrevocable?

Yes, a revocable trust typically becomes irrevocable upon the grantor’s death.

2. Do I need both types of trusts?

Some individuals use both—a revocable trust for managing assets during life and an irrevocable trust for tax benefits or asset protection.

3. How much does it cost to set up a trust?

Costs vary but typically range from $1,000–$5,000, depending on complexity and attorney fees (Forbes).

4. Can I be the trustee of my own trust?

Yes, for a revocable trust, you can serve as your own trustee. For an irrevocable trust, a third-party trustee is usually required.

5. Will a trust replace my will?

No, you still need a will for assets outside the trust and to name guardians for minor children.

Final Thoughts

Choosing between a revocable and an irrevocable trust depends on your financial situation and estate planning goals. If you want flexibility and control, a revocable trust may be best. If you need asset protection or tax advantages, an irrevocable trust is worth considering.

No matter which route you take, consulting an experienced estate planning attorney is essential to ensure your trust aligns with your long-term objectives.