One of the biggest differences between a revocable and irrevocable trust is your ability to make changes to the trust once it’s created. The grantor can modify a revocable trust, while an irrevocable trust is not as easily changed.
Both types of trusts can help protect your assets and allow you to leave them to specific beneficiaries. They each include a grantor, or the creator of the trust, beneficiaries who will receive your assets, and a trustee, who manages your fund and distributes the assets.
Understanding the difference between a revocable trust and an irrevocable trust can help you create a better, stronger estate plan for your needs. Let’s look deeper into revocable vs. irrevocable trusts to help determine which option may be the best fit for you and your estate plan.
What’s a revocable trust?
A revocable trust is a living trustthat outlines the assets you want to give a beneficiary and how the assets will be distributed. Revocable trusts often name the grantor as the trustee, allowing for full control of the trust.
What makes revocable trusts so attractive is the ability to make changes to them after they’ve been created. That means you can update your beneficiaries, how much money or which assets are included, and when the contents of your trust will be distributed.
What’s an irrevocable trust?
An irrevocable trust, which can also be a type of living trust, details your assets and how you’d like them to be distributed to your beneficiaries. However, unlike a revocable trust, irrevocable trusts are pretty much set in stone. Some exceptions allow for changes if all the beneficiaries agree to them, but the proposed updates must go through a lengthy approval process, which can include going before a judge.
Key similarities and differences between revocable and irrevocable trusts
One of the biggest differences between a revocable and an irrevocable trust is your ability to make changes to it after it’s been created. You, the grantor, can modify a revocable trust, while an irrevocable trust can't be easily changed.
But here are other important distinctions between the two — such as issues of privacy, tax benefits, and probate court. Here are some key differences:
Revocable Trust | Irrevocable Trust | |
Can it be easily changed once created? | Yes. Revocable trusts allow for changes including who the beneficiaries and trustees are, what assets are included and instructions for asset distribution. | No.Once an irrevocable trust is created, it can’t be changed or canceled unless the beneficiaries sign off on the modifications (a court may also need to approve them). |
Is it subject to estate taxes? | Yes. Because the trust is still under the grantor's ownership, it can be subject to estate tax. | Typically, no. By removing assets from your ownership into the trust, you may be able to help protect them from estate tax. |
How long does the trust last? | Revocable trusts last as long as you want them to and can be canceled at any time. At the time of your death, a revocable trust becomes irrevocable. | Irrevocable trusts are permanent. They last for your entire lifetime and after you’ve passed. |
Is it excluded from probate court? | Yes. | Yes. |
Is it kept off the public record? | Yes, so you can keep your information (and that of your loved ones) private. | Yes, so you can keep your information (and that of your loved ones) private. |
Review your revocable trust regularly
When it comes to revocable trusts, it’s good practice to review them every three to five years to make sure they still contain the assets you want in them and that the beneficiaries are still the same. For example, you may have grandchildren who you want to include in your trust.
If you’re debating between an irrevocable trust and a revocable trust, consider seeking the help of an estate planning lawyer. They’ll be able to direct you toward the best options for you and your specific situation.
As an estate planning expert with extensive knowledge in trusts and their nuances, I'll delve into the concepts embedded within the discussion of revocable and irrevocable trusts, drawing upon my expertise and understanding in this field.
Trust Structures: Trusts are legal arrangements where assets are managed by a trustee for the benefit of one or more beneficiaries, guided by the terms established by the grantor (the creator of the trust). There are two primary types being discussed: revocable and irrevocable trusts.
Revocable Trust:
- A revocable trust, often termed a living trust, allows the grantor to modify its terms during their lifetime.
- The grantor typically maintains control as the trustee, retaining the power to change beneficiaries, assets, and distribution instructions at will.
- It remains subject to estate taxes since assets within the trust are still considered part of the grantor's estate.
- It offers privacy and avoids probate, keeping details of assets and beneficiaries private and bypassing the court-supervised probate process at death.
Irrevocable Trust:
- An irrevocable trust outlines asset distribution but lacks the flexibility of modification once established, except under certain conditions and with substantial formalities.
- Typically, the grantor relinquishes control over assets transferred into this trust, minimizing estate tax exposure as these assets are no longer considered part of the grantor's estate.
- It provides privacy and avoids probate, similar to a revocable trust.
Key Differences and Similarities:
- Flexibility: Revocable trusts offer flexibility, allowing changes, whereas irrevocable trusts are inflexible, demanding extensive procedures for amendments.
- Tax Implications: Revocable trusts remain subject to estate taxes, while irrevocable trusts can provide potential tax benefits by removing assets from the grantor's estate.
- Duration: Revocable trusts can be dissolved at the grantor's discretion or become irrevocable at death, whereas irrevocable trusts are permanent and persist beyond the grantor's lifetime.
- Probate and Privacy: Both types bypass probate and maintain privacy by keeping details confidential.
Considerations and Estate Planning:
- Regular review of a revocable trust every three to five years ensures it aligns with current wishes regarding assets and beneficiaries.
- Seek guidance from an estate planning lawyer when deciding between irrevocable and revocable trusts. Their expertise can help determine the most suitable option based on individual circ*mstances.
Understanding these nuances aids in creating a robust estate plan aligned with one's objectives, whether prioritizing flexibility, tax advantages, or asset protection for beneficiaries. For personalized advice, consulting an estate planning professional is highly recommended to navigate the complexities and make informed decisions.
