Revocable Trusts vs. Irrevocable Trusts

Feb 27, 2024
Estate Planning

You’ve worked hard to earn the things you have today. You’ve purchased a home, invested wisely, secured a savings account, or started a business; you know these are life changing assets. That means you should plan for what happens to them when you pass away. One way to make a plan for your assets to be passed to your heirs is to create an estate plan or living trust.

A trust is a type of legal arrangement you can use to manage and distribute your assets once you pass away. A living trust is private and done according to your wishes. The person creating a trust is called a grantor. Once a grantor creates a trust, they “fund” it by transferring their assets to the trust. They’ll also name a trustee to manage the trust assets, and choose beneficiaries for the trust property. Beneficiaries are the people or organizations who will receive assets from the trust.

For many people, a key benefit of a trust is that trust assets can avoid the probate process. During probate, a local court oversees the distribution of your estate after you pass away. Probate proceedings are public, and they can sometimes take a lot of time and cost a lot of money — 6% to 8% of your estate — that would otherwise pass to your loved ones. By creating a trust, you can streamline the process of passing your assets on to your beneficiaries. Some trusts are also able to avoid estate taxes, which can be useful for people with a lot of assets.

Estate planning is a critical aspect of securing your financial future and ensuring your assets are distributed according to your wishes. Two common tools in the estate planning toolkit are revocable trusts and irrevocable trusts. Understanding the differences, benefits, and disadvantages of each can help you make informed decisions about which type of trust is best for your circumstances.

Revocable Trusts vs. Irrevocable Trusts | AmeriEstate Legal Plan

Revocable Trusts

Revocable trusts, also known as living trusts, offer flexibility and control during the grantor's lifetime. The key feature of a revocable trust is that it can be altered or revoked at any time, allowing the grantor to make changes as their circumstances evolve. During the grantor's lifetime, they typically serve as the trustee, maintaining full control over assets placed into the trust. An important benefit of revocable trusts is that they ensure property and assets remain readily available for you even if you become incapacitated.

The primary advantages of a revocable trust include:

  • Flexibility and Control: The grantor can modify or revoke the trust at any time, making it suitable for those who want to retain control over their assets.
  • Avoidance of Probate: Assets held in a revocable trust can bypass probate, expediting the distribution process and maintaining privacy.
  • Incapacity Planning: In the event of the grantor's incapacity, a successor trustee can seamlessly manage trust assets without court intervention.
  • Continuous management: Even if you become incapacitated, as long as the revocable trust was funded, assets within it will continue to be managed without interruption.

However, there are also some drawbacks to revocable trusts:

  • No Asset Protection: Assets within a revocable trust remain subject to creditors and legal claims against the grantor.
  • Estate Tax Implications: The trust assets are still considered part of the grantor's estate for tax purposes.
  • Administrative work: Re-titling assets can be time consuming, but necessary to fund a Trust. Not all assets will need to be re-titled.  

Irrevocable Trusts:

Irrevocable trusts are permanent and specific tax advantages but come with a loss of control for the grantor. Once established, an irrevocable trust generally cannot be modified or revoked without the consent of the beneficiaries.

Key benefits of irrevocable trusts include:

  • Asset Protection: Assets placed in an irrevocable trust are shielded from creditors and legal claims, providing enhanced protection.
  • Estate Tax Planning: Irrevocable trusts may help reduce estate taxes as the assets are typically excluded from the grantor's estate.
  • Gift Tax Benefits: Irrevocable trusts can facilitate the gifting of assets, potentially minimizing gift taxes.

However, irrevocable trusts also have some downsides:

  • Loss of Control: Once assets are transferred into an irrevocable trust, the grantor relinquishes control, and changes may require the consent of beneficiaries.
  • Complexity:  The creation and administration of irrevocable trusts can be more complex, often requiring legal expertise.
  • Higher tax rates: Any income tax that an irrevocable trust earns will be taxed separately, and often at a higher rate.
  • Additional tax return: An irrevocable trust will need to file a tax return, and there will often be a cost to prepare and file.
  • Complex language and terms: Irrevocable trusts usually have difficult terms that may be hard to understand. 

Should you get an irrevocable trust?

Irrevocable trusts are difficult to change. Reasons you might benefit from an irrevocable trust are:

  • You're very wealthy and want to reduce your taxable estate
  • If you have a disabled dependent

Irrevocable Trusts vs. Revocable Trusts

Revocable living trusts are more common, since it gives the creator more control.

Remove or re-title assetsYesNo
Rename beneficiariesYesNo
Protection from creditorsNoYes
Tax shelter (estate tax, capital gains tax)NoYes

Choosing the Right Trust

The decision between a revocable and irrevocable trust depends on individual goals, circumstances, and preferences. Individuals who prioritize flexibility, control, and simplified administration during their lifetime may find a revocable trust more suitable. On the other hand, those seeking robust asset protection, estate tax planning, and the ability to make irrevocable gifts may opt for an irrevocable trust.

In conclusion, both revocable and irrevocable trusts serve distinct purposes in estate planning. Consulting with a knowledgeable estate planning attorney is crucial to tailor a strategy that aligns with individual needs, ensuring a comprehensive and effective approach to safeguarding assets and legacy.

Which type of trust is best for you?

The type of trust that’s right for you will depend on your situation. Revocable trusts are usually more common due to their flexibility.

You may want to consider a revocable trust if:

  • You want the transfer of your assets to your heirs to be private and avoid the probate process
  • You own real estate in multiple states and want to avoid ancillary probate in a state other than the one where you live
  • You think your wishes for your assets will change over the course of your lifetime, and you want the freedom to swap beneficiaries
  • You want to continue using and managing your own assets without restriction after you establish the trust
  • The value of your estate is less than the federal estate tax exemption

You may want to consider an irrevocable trust if:

  • The value of your assets is higher than the federal estate tax exemption and you want to avoid estate taxes
  • You’re comfortable giving up use or control of your own assets after you establish the trust
  • You want to protect your assets from future creditors. Since assets in an irrevocable trust aren’t considered available to you, they may receive protection from certain creditors and lawsuits

Setting up a trust can be complicated. If you want to create one and have questions about the process, contact AmeriEstate Legal Plan for a free consultation.