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Understanding Revocable and Irrevocable Trusts

A living trust is a holding place for assets you want to pass on to your heirs, either during your lifetime or after you’re gone. This legal document can expedite the probate process and ensure that your wealth is distributed according to your wishes. Depending on how it’s structured, it could also shield your estate from creditors and minimize taxes. Understanding the differences between a revocable versus irrevocable trust can be an important part of estate planning. Here’s what you need to know.

What Is a Revocable Trust?

A revocable trust can hold all kinds of assets, from real estate to bank accounts to retirement funds. The grantor, who creates the trust, appoints a trustee to manage the trust and ensure that their wishes are carried out.

A revocable trust is unique in that the grantor can amend the trust at any time. That might involve naming a different trustee, changing beneficiaries, or pulling assets out of the trust. Revocable trusts are flexible estate planning tools, but there are potential drawbacks to consider.

Pros and Cons of Revocable Trusts

Pros

• They’re easy to modify. If the grantor changes their mind about something or wants to amend the trust, they can do so relatively quickly.
• The grantor can be the trustee. During the grantor’s lifetime, they can name themselves as the trustee and maintain control of their assets.
• Revocable trusts are private. While the probate process is a matter of public record, living trusts are kept private. That allows the grantor to maintain privacy while their wealth is distributed.

Cons

• Assets are not protected from creditors. When someone passes away with debt, their outstanding balances will likely be paid by their estate. Creditors can draw on assets in a revocable trust to satisfy unpaid debts.
• It won’t reduce estate taxes. If your estate has assets totaling at least $13.6 million, including assets in a revocable trust, it will be subject to estate taxes.
• It could make you ineligible for certain government benefits. If you have too many assets, you may not qualify for benefits like Supplemental Security Income (SSI), SNAP benefits, or Medicaid.

What Is an Irrevocable Trust?

Like a revocable trust, an irrevocable trust can expedite the probate process while preserving the grantor’s privacy. But once assets are placed into the trust, it’s difficult to make changes. The grantor relinquishes ownership of these assets, which are then owned by the trust.

This type of living trust is usually more complex to establish, but doing so may be worth it—especially if you have considerable wealth.

Pros and Cons of Irrevocable Trusts

Pros

• Trust assets are protected from creditors. If you have debt in your name after you pass away, creditors can’t come after assets in an irrevocable trust.
• It reduces estate taxes. Trust assets technically belong to the trust (not the grantor). As such, these assets usually aren’t subject to estate taxes.
• It can help you qualify for government benefits. Remember that assets in an irrevocable trust are no longer owned by the grantor. That could significantly reduce your assets and make you eligible for certain government benefits.

Cons

• They’re inflexible. Establishing this type of trust can be complicated, which may result in hefty legal fees. Amending an irrevocable trust is also difficult and requires the approval of all beneficiaries.
• Trust assets are subject to taxes. That includes any income generated by these assets. In some cases, the grantor or the trust might have to pay taxes.
• It isn’t wise for the grantor to be the trustee. Being your own trustee could lead to a higher tax liability for you or your estate.

Revocable vs. Irrevocable Trusts

Knowing the similarities and differences between revocable and irrevocable trusts can help you decide which may be best for you.

When to Choose a Revocable Trust

• You want something simple. Revocable trusts are relatively easy to establish and manage. You can retitle trust assets, change beneficiaries, and add or drop trustees whenever you please.
• You want to maintain control of trust assets. With a revocable trust, you can name yourself as a trustee and be on the receiving end of asset distributions.
• You’re already eligible for government benefits. This type of trust might make sense if you don’t need help qualifying for means-tested government benefits.

When to Choose an Irrevocable Trust

• You want to avoid estate taxes. If you have substantial wealth and want to sidestep estate taxes, an irrevocable trust might help you do that.
• You have too many assets to qualify for government benefits. After offloading assets into an irrevocable trust, you may be eligible for much-needed government programs such as Medicaid.
• You’re hoping to protect your assets from creditors. In most cases, creditors cannot tap these assets to satisfy debt that’s in your name after your death.

The Bottom Line

If you’re torn between a revocable and irrevocable trust, it’s important to consider each one’s benefits and drawbacks. Both can prioritize your privacy and set the stage for a smoother probate process for your heirs. The right one for you will depend on your estate planning goals. A skilled financial professional can provide personalized advice.

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