In this article, we’re exploring the difference between revocable vs irrevocable trust structures. This is an important question that many of our members face when exploring the world of estate planning and wealth management.
With this in mind, we will share the main difference between a revocable vs irrevocable trust below, along with the benefits you might want to consider for both.
We will also be sharing a few considerations to help you navigate the options that are best for you along with answers to common questions.
Of course, before making a final decision, you should speak with a qualified estate planning attorney to help you make the best decision for your situation.
This article is part of our free series on banking, estate planning, and the legal documents that surround them, including a free detailed guide to opening a private bank account for yourself and your family members.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- Revocable vs Irrevocable Trust
- Benefits of Revocable Trusts
- Benefits of Irrevocable Trusts
- What Main Parties Are Involved in an Irrevocable Trust?
- How to Determine Which Type of Trust Is Right for You?
- Frequently Asked Questions
- Do You Want Help Opening Bank Accounts?
Revocable vs Irrevocable Trust
The main difference between a revocable trust and an irrevocable trust is the level of control and ownership that the grantor of the trust is able to maintain over the assets during their lifetime.
A revocable trust, also known as a living trust, allows the grantor to maintain control over the assets contributed. With this in mind, the grantor typically serves as the Trustee of a revocable trust until their death.
An irrevocable trust cannot be amended after it has been established by the grantor. This means that the grantor loses control over the assets. The assets and the trust are then managed by the trustee. This approach offers asset protection, estate tax planning benefits, and creditor protection.
Importantly, while a revocable trust can be amended prior to the grantor’s death, it automatically converts to an irrevocable trust after the grantor’s death, and can no longer be amended.
Of course, while there are differences between revocable vs irrevocable trust, there are also similarities. Revocable and irrevocable trusts are estate planning tools that avoid probate, they both allow for the distribution of assets to a beneficiary (or beneficiaries), they have a trust agreement, require trust administration, own trust property, and are formed as a legal trust.
Example of Revocable Trusts
One of the most common examples of a revocable trust is the revocable living trust, which allows the grantor to retain control of the assets until their death. After the death of the grantor, the assets of a revocable living trust are then distributed to the beneficiaries while avoiding probate.
Example of Irrevocable Trusts
One of the most common examples of an irrevocable trust is the irrevocable life insurance trust. An irrevocable life insurance trust (ILIT) holds life insurance policies directly, which avoids estate tax for the beneficiaries.
Benefits of Revocable Trusts
The benefits of revocable trusts typically relate to the ongoing control that they offer the grantor of the trust. But, they also offer clear steps for distribution, the avoidance of probate, and more. Here is a look at the common benefits that people seek when setting up a revocable trust.
- Ability to avoid probate
- Ongoing control of the assets
- Management of assets if the grantor is incapacitated
- Privacy of assets and distributions as it avoids probate
Benefits of Irrevocable Trusts
The benefits of an irrevocable trust typically relate to estate planning benefits and asset protection. That said, irrevocable trusts still allow for distributions and avoid probate since the assets are now owned by the trust. Here is a look at the common benefits that people seek when setting up an irrevocable trust.
- Ability to avoid probate
- Avoiding estate taxes
- Protection from creditors
- Overall asset protection
Irrevocable trusts also offer benefits for Medicaid planning if the assets are contributed prior to the “look-back” period. Additionally, irrevocable trusts are often used by individuals who wish to engage in philanthropic giving.
How to Determine Which Type of Trust Is Right for You?
There are a number of important factors to consider when deciding which type of trust is right for your situation. These include your overall estate planning goals, tax planning efforts, desire for ongoing control over the assets contributed, and much more. Here is a closer look at a number of the factors you might want to consider.
- Overall estate planning objectives of the grantor
- Level of control and flexibility the grantor desires
- Desired level of asset ownership and protection
- Degree of asset and creditor protection desired
- Tax planning efforts of the grantor and for the assets
- Long-term care considerations
- Family and beneficiary-specific considerations
- And more
Needless to say, if you are going through the process of trying to decide which trust is best for you, you should speak with a qualified estate planning professional to help you navigate your options.
What Main Parties Are Involved in a Revocable and Irrevocable Trust?
Regardless of your decision after comparing a revocable vs irrevocable trust, there are a few key parties that will be involved in the resulting structure. Of course, depending on the specific trust arrangement, there are other parties that may be involved as well.
With this in mind, here is a look at the most common parties involved in a revocable and irrevocable trust, along with a few additional parties to consider.
- Grantor of the trust (also known as the Settlor or Trustor)
- Trustee of the trust
- Beneficiaries of the trust
- Successor Trustee of the trust
Again, depending on the specific arrangements of the trust, there may be additional parties involved, including:
- Protector of the trust
- Trust advisor
- Custodian of the trust
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Frequently Asked Questions
Below are a few of the most common questions we receive from people looking into a revocable vs irrevocable trust. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
What Are the Disadvantages of a Revocable Trust?
The main disadvantages of a revocable trust include that they do not offer asset protection or creditor protection and they do not avoid estate taxes. Instead, they allow the grantor to ensure assets are distributed in line with their wishes and that assets avoid probate.
Does Revocable Trust Become Irrevocable at Death?
Yes, a revocable trust becomes an irrevocable trust upon the death of the grantor. Prior to the death of the grantor, a revocable trust may continue to have changes, including adding or removing assets.
Can You Withdraw Money From an Irrevocable Trust?
It is possible to withdraw money from an irrevocable trust under certain conditions. These conditions usually include mandated distributions to the beneficiaries (which may include the grantor), discretionary distributions by the trustee (if permitted), special provisions allowing for distributions, and other forms of consent such as court approval.
What Is an Example of an Irrevocable Trust?
An example of an irrevocable trust is an irrevocable life insurance trust, which is setup to hold life insurance policies directly, which avoids estate tax for the beneficiaries.
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