Revocable Trust vs. Irrevocable Trust: An Overview

A revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed at any time. An irrevocable trust describes a trust that cannot be modified after it is created without the beneficiaries’ consent.

A trust is a separate legal entity a person sets up to hold their assets. Trusts are set up during a person’s lifetime to assure that assets are used in a way that the person setting up the trust deems appropriate. Once assets are placed inside a trust, a third party, known as a trustee, manages them. The trustee determines how the assets are invested and to whom they are distributed when the trust owner dies, although a trustee must manage the trust following the guidelines laid out when the trust was formed.

It’s not uncommon for an individual to use a trust instead of a will for estate planning and stipulating what happens to their assets upon their death. Trusts are also a way to reduce tax burdens and avoid assets going to probate.

Revocable Trust (Living Trust)

The two basic types of trusts are a revocable trust, also known as a revocable living trust or simply a living trust, and an irrevocable trust. The owner of a revocable trust may change its terms at any time. They can remove beneficiaries, designate new ones, and modify stipulations on how assets within the trust are managed. Given the flexibility of revocable or living trusts in contrast with the rigidity of an irrevocable trust, it seems all trusts should be revocable.

However, there are a few key disadvantages to revocable trusts. Because the owner retains such a level of control over a revocable trust, the assets they put into it are not shielded from creditors the way they are in an irrevocable trust. If they are sued, the trust assets can be ordered liquidated to satisfy any judgment put forth. When the owner of a revocable trust dies, the assets held in trust are also subject to state and federal estate taxes.

If the beneficiaries of a revocable trust are young (not of legal age) and the minor’s real estate assets are held within a trust, it can replace the need to appoint a conservator, should the grantor die. In addition, if a grantor names beneficiaries who they deem unreliable with money, the trust can set aside a specific amount to be distributed at recurring intervals, or when they come of age (if they are minors).

Irrevocable Trust

The terms of an irrevocable trust, in contrast, are set in stone the minute the agreement is signed. Except under exceedingly rare circumstances, no changes may be made to an irrevocable trust. Any alterations would have to be done by 100% consent of its beneficiaries and/or by order of the court, not on the whim of its testator or creator. The exact rules can depend on state laws.

The main reason to select an irrevocable trust structure is taxes. Irrevocable trusts remove the benefactor’s taxable estate assets, meaning they are not subject to estate tax upon death. They also relieve the benefactor of tax responsibility for any income generated by the assets. Irrevocable trusts can be difficult to set up and require the help of a qualified trust attorney.

If you work in a profession where you may be at risk for lawsuits, such as a medical professional or lawyer, an irrevocable trust could be helpful to protect your assets. When assets are transferred, whether they are cash or property, to the ownership of an irrevocable trust, it means the trust is protected from creditors, and even legal judgment. However, an irrevocable trust is a bit more complicated to set up than a revocable trust, namely because it cannot be altered.

Key Differences

There are some key differences between a revocable and an irrevocable trust beyond that a revocable trust can be altered but an irrevocable trust cannot be changed. A grantor can also be the trustee with a revocable trust, but not so, with an irrevocable trust. Privacy is protected when a revocable trust is set up. This means when the grantor dies, the information in the trust is kept within the family. If you set up an irrevocable trust, documentation of the creation of the trust may be recorded if the estate goes through a legal proceeding.

Revocable Trust vs. Irrevocable Trust Example

Let us say an individual creates a revocable trust to benefit their family and protect their assets. In doing so, as the grantor of a revocable trust, they can also name themselves the trustee and the beneficiary of the trust. When they get older, they can go back into the trust and name a new beneficiary and add a trustee to step in if they become incapacitated in their more senior years. The trust can be amended several times within the trustee’s lifetime, say if the trustee remarries or after the birth of a grandchild. When they pass, their trust is kept out of probate, and the stipulations in their trust can be carried out discreetly. The disadvantages, however, are it can be costly to write one up and even more expensive if you make alterations numerous times. A trust must be funded, and assets must be moved into the trust, which can also be costly.

Now, let’s say the same individual creates an irrevocable trust to benefit their family and protect their assets. Instead of naming themselves the trustee and beneficiary, the grantor must designate a separate trustee and feel secure giving up ownership and controlling assets, such as property. They will now have to carefully vet a trustee and a trust protector who acts as an oversight manager of the trust. Then, they must name beneficiaries. Once assets have been put into an irrevocable trust, unlike a revocable trust, the grantor now must let it rest, as they cannot alter the trust.

Under certain circumstances, the inability to change the trust makes an irrevocable trust potentially a risky endeavor. It is difficult to change the named beneficiaries in an irrevocable trust. And the grantor may not be able to access their assets, even if a life event makes it necessary.