Revocable vs Irrevocable Trust: What’s the Difference?

A trust can be an excellent estate planning tool, passing assets to loved ones while avoiding the probate process, and potentially eliminating the need to pay an estate tax (when implemented correctly). But there is far more nuance to a trust than most might guess, and there is far more to implementing a revocable vs irrevocable trust than simply picking a ‘DIY’ option and quickly skimming over the fine print.

Trusts must be implemented more like a scalpel than a cleaver – with surgical precision, and a steady hand. Each trust should ideally be tailored to the estate it is meant to serve, and grantors must carefully choose trustees to manage their trust, often for many years.

Unlike wills, most trusts (living trusts) go into effect the moment they are signed and notarized, rather than upon death. A trust can be modified to go into effect once the grantor has passed away or become permanently incapacitated (testamentary trusts), should they want to maintain ownership and control over their assets before passing them into a trust.

But among the many different types of trusts and their sheer versatility, all trusts can essentially be divided into two kinds: revocable vs irrevocable trust.


Outlining the Basics of a Trust

The simplest way to describe what a trust does is to view it as an entity existing solely to hold assets and property ‘in trust’ for one or more beneficiaries. Two parties work together to create and manage the trust (grantor and trustee), and when certain conditions are fulfilled, the trustee distributes the contents of the trust to the respective beneficiaries.

Trusts can be as simple or as complicated as they need to be, and there are many different iterations of trusts, built to accommodate the whims and needs of nearly every imaginable circumstance.

However, trusts can be much more pricey than wills, because unlike wills which only truly become relevant when the testator of the will passes away, while trusts (living trusts, to be more precise) require the cooperation and management of a trustee from the get-go.


Wills vs Trusts

Trusts can still save certain estates much more money than a will might. Wills must go through the probate process, which is a public legal process of disseminating and distributing an estate. This is a lengthy and at times expensive process, particularly for larger, more complex estates. Trusts bypass the probate process entirely, saving certain estates a considerable amount of time and resources.

Setting up a trust is simple on paper. The first step is the trust document, which outlines the contents of the trust, the beneficiaries receiving said contents, the conditions for the trust’s distribution, and the identity and consent of the successor trustee. Trust documents are signed by the relevant parties, witnessed, and notarized.

Then, everything mentioned within the trust must be aptly named as such – meaning, deeds must be drafted to change the title of assets and properties named in the trust to reflect their new status as being ‘owned’ by the trust rather than an individual (i.e., a home’s new title would indicate that it is part of John Smith’s Trust, rather than in John Smith’s own name).

Certain accounts and assets cannot be funded into a trust without going through a number of different steps. For example, life insurance policies and retirement accounts typically cannot be funded into a trust, and the priority for these accounts is to immediately empty in a designated beneficiary’s account upon death.

These accounts bypass probate. The same goes for a ‘Totten trust’, which is an account or property marked ‘payable upon death’ (POD), or ‘transfer upon death’ (TOD), both of which require designated beneficiaries, and both of which bypass probate.


Revocable Trusts

Now, onto the next step. While trusts all hold property and assets in trust until certain conditions are met, some trusts are more ‘final’ than others. Revocable trusts, as the name implies, can be amended, and even reneged, given one goes through the appropriate steps.

But revocable trusts still tie the grantor to the property to some degree. This can be useful if the grantor wants to retain control, but it may not be in their best interest if the purpose of a trust is to completely separate certain assets and property from the rest of the estate, for tax purposes or otherwise.

The benefits of revocable trusts are that they are much more flexible, which is generally a plus. Circumstances can change, tax codes are constantly being amended, and life-altering events may push you to change beneficiary designations and amend your plans.

But the downsides of a revocable trust lie therein that any and all assets in a revocable trust are still functionally your own, but with slightly limited control. This means that assets within a revocable trust may still be liquidated to cover the estate’s debts and expenses, or to cover fees and costs if you are being sued.

Revocable trusts also retain all the downsides of trusts in general:

      • They do not wholly replace wills.
      • They cannot be used to assign guardians for your children.
      • They can be a fair amount of paperwork.
      • They are generally pricier to set up.
      • They certainly shouldn’t be set up without the aid of an experienced professional (who may command experienced rates).

However, for many estates, this upfront investment is well worth it.


Irrevocable Trusts

Irrevocable trusts are much harder to amend or revoke – it can be done, but the process requires the consent and cooperation of all involved, including the beneficiaries, and these trusts are rarely changed. Irrevocable trusts exist for when you need to separate yourself from your assets, often to save them from potential creditors or to reduce your own tax burden.

In doing so, you also lose all rights to the property you have funded into your new irrevocable trust. It is within the management of your trustee, who has a fiduciary duty to represent your best interest, and the best interests of the designated beneficiaries attached to the trust.


Revocable vs Irrevocable Trust: Which Is Right for You?

It is impossible to make a good recommendation on the basis of a few basic factors. Irrevocable trusts are generally the key to asset protection, and they offer tax-shelter benefits. Revocable trusts offer greater control and can be amended in the future, should priorities (or the law) change.

However, when it comes choosing between a revocable vs irrevocable trust, if you believe a trust would be a good fit for your estate, your first step should be to contact a reputable estate planning professional.


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