Revocable vs. Irrevocable Trusts: Which One Fits Your Goals?

Choosing the Right Type of Trust

Trusts can be revocable or irrevocable. They both offer valuable benefits, but how do you know which one suits your needs? Revocable trusts let you skip probate. Irrevocable trusts are difficult to change, but provide specific estate planning advantages. They are different in flexibility, asset protection, tax savings, and more.

In this guide, we will break down how revocable and irrevocable trusts work, the pros and cons of each, and how to decide which trust is better for you.

What Is a Trust?

A trust is a legal arrangement that lets you transfer assets to a trustee who will manage the assets on behalf of your beneficiaries. It gives you more options for asset distribution and protection during your life and after death.

Key components of a trust

Grantor: Creates and funds the trust

Trustee: Someone you assign who manages the assets

Beneficiaries: Those who will receive the benefits of the trust

There are two main types of trusts: irrevocable and revocable. Since they have major differences, let’s delve into how each type of trust works.

What Is a Revocable Trust?

A revocable trust, AKA a living trust, can be changed after you, the grantor, create it. That means you can cancel it, amend it, or modify it at any time during your life.

With a revocable trust, you get to remain in control of your assets while alive. After death, the trust automatically becomes irrevocable. The assets in the trust get distributed according to your instructions.

Key benefits of a revocable trust

Flexibility and control: You can change or revoke the revocable trust whenever you want while alive. This gives peace of mind that if someone major changes in your life, you can still easily modify your trust.

Avoid probate: The probate process is a public court handling/distribution of your assets.

Maintain privacy: If you have a will, the probate process will distribute your assets as instructed. However, this is a public affair and people can look up your probate records. A trust lets you distribute your assets privately, providing more privacy for you and your family.

Simplifies management: If you become incapacitated or otherwise do not want to deal with estate planning, a revocable trust can be easier to handle.

Best for

Revocable trusts tend to be best for those who want a private asset distribution process or less hassle related to it. If you stick with a will (or no estate plan at all), probate can take months or even years. A revocable trust allows you to maintain privacy.

Individuals who want full control during their lifetime also benefit from a revocable trust. Irrevocable trusts provide much less control.

Homeowners or those with moderate estates can also benefit from a revocable trust.

What Is an Irrevocable Trust?

An irrevocable trust typically cannot be changed or revoked after being established.

If you do end up wanting to change your irrevocable trust, you would need to go through the process of getting beneficiary consent or a court order. In those cases, getting beneficiary consent can be a huge pain.

As for asset ownership, an irrevocable trust has you permanently transfer ownership of the chosen assets to the trust. This has benefits and drawbacks. You lose control of these assets–not great. But the trust also protects these assets from creditors and plaintiffs, so if you expect or dread a lawsuit against you, an irrevocable trust can be invaluable.

The trustee manages those assets independently of you. The trust will typically file a tax return itself.

Key benefits of an irrevocable trust

You might be wondering why set up an irrevocable trust if you lose so much control over it. There are many potential benefits associated with irrevocable trusts, such as:

Strong asset protection: People worried about creditors, lawsuits, or other financial trouble can protect their assets using an irrevocable trust.

Potential tax advantages: Do you have a complex estate? Irrevocable trusts can reduce your taxable estate. This can be an extremely advantageous estate planning strategy for those with a large estate.

Medicaid planning: Medicaid planning may involve setting up an irrevocable trust. It shields your assets from Medicaid (or nursing home) costs.

Best for

High-net-worth individuals who benefit from estate tax reduction can leverage an irrevocable trust. The number for what makes a large estate is around $13+ million. If your estate is legally large, it becomes subject to federal estate tax.

People concerned about lawsuits or long-term care costs can also set up an irrevocable trust to protect themselves and their beneficiaries.

Charitable or legacy-focused estate plans can be complicated. An irrevocable trust can be a good way to set up a charity-focused estate plan.

Comparison: Revocable vs. Irrevocable Trusts

Let’s take a look at the key differences between revocable and irrevocable trusts.

There are benefits and drawbacks to revocable and irrevocable trusts. In general, a revocable trust offers more control and flexibility, but an irrevocable trust has tax advantages and legal asset protection.

When to Choose a Revocable Trust

1. Stay in control of your assets

A revocable trust provides more asset control and flexibility. With an irrevocable trust, you would essentially lose control of your assets. If you don’t want that to happen, then a revocable trust is preferable.

2. Simplify inheritance for family

Irrevocable trusts can cause problems within the family while you’re alive. If you need to make any changes to your trust, it can be awkward or difficult to ask the beneficiaries for consent. Obtaining a court order can also be a frustrating process.

Plus, your loved ones will be grieving and overwhelmed after your death. A complex inheritance process won’t help. A revocable trust can help make the inheritance process easier for your family.

3. Avoid probate

The probate process can be stressful, expensive, and time-consuming. You can avoid the probate process if you properly set up a revocable trust, preventing random people from accessing the probate’s public records.

4. Don’t need tax or asset sheltering

If you’re not worried about getting sued, chased by creditors, or taxed, then a revocable trust is often preferable.

Case studies and examples

• A homeowner in their 40s who wants a relatively simple family estate plan
• A family with difficult dynamics that may benefit from more flexible estate plans

Tip: You can easily create a valid, revocable living trust using platforms like LegalZoom, then customize it later with professional advice.

When to Choose an Irrevocable Trust

1. Reduce estate taxes or preserve wealth for heirs

Tax advantaged accounts and estate plans can protect your legacy and assets. An irrevocable trust can help you preserve your wealth and inheritance by reducing estate taxes.

2. Protect assets from creditors or lawsuits

Plaintiffs and creditors can obtain permission from the court to take your assets out of a revocable trust. However, if you have an irrevocable trust, you have permanently transferred your chosen assets into the trust. They will be shielded from creditors and lawsuits.

3. Qualify for Medicaid or long-term care protection

Healthcare expenses as you age can become overwhelming. For Medicaid planning purposes, you may want an irrevocable trust so that you can qualify for certain healthcare benefits. However, this isn’t for everyone.

4. Fund a charitable legacy

A charitable estate plan often involves creating a specific type of irrevocable trust: a charitable remainder trust. Charitable remainder trusts are useful for planning major donations to charities. It can also help you defer income taxes and provide a predictable income for life.

Case studies and examples

• A retiree with a sizable estate who wants to reduce taxable value and protect family assets
• A philanthropist who wants to donate a significant amount of their assets to charities they trust

Risks

Irrevocable trusts usually require professional legal guidance due to how complex they can be. If you cannot afford an estate planner or attorney, it may be too risky to use an irrevocable trust.

Can You Have Both?

Yes: Many people use both revocable and irrevocable trusts as part of a layered estate plan.

Your revocable trust manages day-to-day assets and ensures smooth transfer after death, while your irrevocable trust can hold your assets that require long-term protection, such as life insurance and long investments.

However, having multiple trusts can be complicated. It is a good idea to consult an expert estate planner or use a tool like LegalZoom.

Tip: You can use Ethos life insurance, which has a payout that helps fund your irrevocable trust, creating tax-efficient generational wealth.

The Role of Legal and Financial Tools

Trusts can pose legal, financial, and personal problems if you don’t set them up properly. Professional help in the form of attorneys and financial advisors can help ensure your trusts are legally sound and aligned with tax laws.

Best online tools for estate planning

LegalZoom: Lets you create and manage revocable living trusts affordably

Ethos: Ethos lets you choose quick, affordable life insurance to pair with trust planning for family protection

A hybrid approach can benefit most people. You can start online to make a basic trust (or will), and then consult a professional for complex estates or needs.

Common Mistakes to Avoid

Not funding the trust

There are actually many people who forget to transfer their assets into the trust, leaving it empty. Remember to transfer your assets when you can. Nobody can predict when an accident can happen, leaving you incapacitated or worse. It is best to fund the trust while you can.

Of course, this becomes harder if you opt for an irrevocable trust. Irrevocable trusts can be very challenging to modify. Your state may allow you to use special estate planning techniques to alter your irrevocable trust.

Using the wrong trust type for your goals

With so many trust types available, choosing the right kind can make a surprisingly large difference. Review the different types of trusts, from revocable to irrevocable, education to charitable, there are so many that can benefit you.

Assuming “one and done”

Trusts require periodic reviews. Major life changes can impact your life goals. You want to check the terms of your trust and make any updates to beneficiaries, trustees, or assets as needed。

If you set up an irrevocable trust, there are still ways to modify it, though they are challenging. You would need beneficiary consent or a court order. An attorney can help you figure out how to change an irrevocable trust.

Conclusion: The Right Trust Gives You Control and Confidence

Both revocable and irrevocable trusts serve powerful purposes and have their own drawbacks.

Revocable trust: Flexible, but lacks direct tax benefits and assets can be taken by creditors or lawsuits.

Irrevocable trust: Inflexible, but has potential Medicaid/tax advantages and asset protection.

To choose the right type of trust, consider your priorities. Do you prefer flexibility and convenience? A revocable trust is better. Do you want asset protection and tax efficiency? Irrevocable trusts can be useful.

Check out universal life insurance for more estate planning tools.