Revocable vs. Irrevocable Living Trusts

The goals behind your trust will help you choose the type

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Trusts come in all shapes and sizes, and many are formed with specific purposes in mind. A living trust is one that the grantor—the individual who creates and funds the trust—sets up during their lifetime. These are also sometimes called "inter vivos" trusts and they're different from testamentary trusts, which are created under the terms of an individual's will after death.

All living trusts are either revocable or irrevocable. The primary difference between the two is whether you, as the grantor, have the ability to change the trust over time.

What's the Difference Between a Revocable Trust and an Irrevocable Trust?

 Revocable Trust  Irrevocable Trust
Can be changed (or revoked) at any time Cannot be changed once it is signed (with rare legal exceptions)
Grantor can act as trustee Grantor must elect a trustee
Assets belong to the grantor until transferred Assets belong to beneficiaries, under management of trustee
Assets are not shielded from lawsuits against the grantor Assets are shielded from grantor's creditors
Not subject to probate Assets are not subject to grantor's estate taxes
Can be set up to transfer assets automatically at a trigger event AB and ABC types provide tax benefits for spouses
Converts to irrevocable trust upon grantor's death Can be used to make tax-exempt charitable donations
Protects the privacy of property and beneficiaries Can incorporate life insurance benefits

A revocable living trust can be changed at any time. You can modify it with a trust amendment if you have second thoughts about a provision in the trust's terms, such as if you change your mind about who should be a beneficiary. You can even revoke or undo the entire trust if you decide that it just doesn't serve your purposes any longer.

An irrevocable trust can't be changed by the grantor after the agreement has been signed and the trust has been formed and funded. You can't take property back that you've placed into an irrevocable trust. You can't act as trustee and manage the trust's assets. You form the trust and step aside for all time. For the most part, it's forever, although there are a few rare exceptions.

Ownership of Assets

If you set up a revocable trust, all assets transferred to the trust are still considered your own personal property because you continue to have absolute control over them. This is beneficial if you want to keep control over the assets, but the downside is that ​creditors can still reach them. A revocable trust offers no protection if you're sued—your assets are at risk just as if you still owned them in your own name. The law takes the position that if you can undo or change the trust at any time, you still own the assets.

It's common for the grantor of a revocable trust to personally act as trustee, managing its assets, after the trust is formed and funded.

Irrevocable trusts, on the other hand, are commonly used to provide asset protection for the grantor and their family. By placing assets into an irrevocable trust, the grantor gives up complete control over and access to the trust assets. They therefore can't be reached by the grantor's creditors because the grantor no longer owns them. But the grantor can name their family as beneficiaries so they're still providing for them—the assets are just outside of the reach of creditors.

Probate and Taxation

Revocable trusts avoid probate of the assets they hold. Although they're still taxable for estate tax purposes, they'll pass directly to the beneficiaries named in the trust agreement without probate court involvement. This means that they constitute part of your estate at the time of your death, so both state estate taxes and federal estate taxes might come due.

Irrevocable trusts are commonly used to remove the value of property from a person’s estate so that property can't be taxed when the person dies. The individual who transfers assets into an irrevocable trust permanently gives those assets to the trustee and to the beneficiaries of the trust. Because they no longer own the assets, they don't contribute to the value of the estate. They're therefore not subject to estate taxes when the individual dies.

Privacy

A revocable trust can protect the privacy of your property and beneficiaries when you die. Because it's not subject to probate, your trust agreement remains a private document. It doesn't become a public record for all the world to see. Your assets and who you've decided to leave your estate to will remain a private family matter.

Irrevocable trusts are not public record, but in the case of probate or other court-related matters, documentation may become part of the record.

Contrast this with a last will and testament that has to be admitted for probate. It becomes a public record that anyone can see and read as soon as it's submitted to the court.

Government Assistance

With revocable trusts, since the grantor technically owns all of the assets until transfer, they are considered in calculations when applying for government aid programs and for Medicaid planning purposes.

With an irrevocable trust, since you're effectively giving away your property for all time, its value can no longer be counted against you for purposes of qualifying for government programs in a time of need. For example, eligibility for Medicaid is restricted to those with negligible assets and income.

You can ensure that your property ultimately will go to your beneficiaries, not to a nursing home, when you place it in such a trust.

There's a caveat here, however. Medicaid imposes a five-year "look back" period in 49 states and Washington, D.C., as of 2021. The value of property that's given away within this time period still counts against the applicant for qualifying purposes. Many states make an exception for irrevocable funeral trusts, however, where you can set aside enough for your burial within this five-year period.

Which Is Right for You?

The most important factor to consider in choosing a which type of trust to establish is whether you will need to modify it over time in order to accomplish your specific goals. Both revocable and irrevocable trusts can be adapted to suit a grantors specific wishes, but this is accomplished in different ways. Revocable trusts can be changed over time, either by the grantor's will or through clauses that can impose modifications for certain triggering events; irrevocable must utilize different forms that must be established at the time of creation.

How to Customize a Revocable Trust

By default, a revocable living trust becomes irrevocable when the grantor dies because the grantor is no longer available to make changes to it. However, revocable trusts can be designed to break into separate irrevocable trusts at the time of the grantor's death for the benefit of children or other beneficiaries.

Additionally, revocable trusts can be set up to adjust to designated triggering events. For example, a revocable trust allows you to plan for mental disability. Assets held in the name of the trust can be managed by a successor trustee if the grantor becomes mentally incapacitated. The grantor can name the trustee, someone they trust to take over in the event that they can no longer personally manage the trust.

How to Customize an Irrevocable AB Trust

An AB trust is created for the benefit of a surviving spouse and it's irrevocable. It can make full use of the deceased spouse's exemption from estate taxes through funding of the B part of the trust at the time of death with property valued at or below the estate tax exemption. Then, if the value of the deceased spouse's estate exceeds the estate tax exemption, the A Trust will be funded for the benefit of the surviving spouse and payment of estate taxes will be deferred until after the surviving spouse dies.

How to Customize an Irrevocable ABC Trust

ABC trusts are a type of irrevocable trust that can be used by married couples who live in states that collect a state estate tax when that state's estate tax exemption is less than the federal estate tax exemption. For example, in 2021 the federal estate tax exemption is $11.7 million, while for many states it is $1 million or less. The first $1 million of an estate would go into the B Trust to protect that portion from estate taxes. The next $10.7 million would go into the C Trust, and anything over the total of $11.7 million would go into the A Trust.

How to Customize an Irrevocable Life Insurance Trust

Irrevocable life insurance trusts are set up to accept life insurance benefits at the time of the grantor's death. This can take a sizable chunk of value out of an estate that's potentially subject to the estate tax, bringing the value down below that year's estate tax exemption threshold. You would name the trust as the policy's beneficiary, then you can set terms for the trust dictating who ultimately gets the proceeds at the time of your death.

How to Customize an Irrevocable Charitable Trust

An irrevocable trust can accomplish charitable estate planning through a charitable remainder trust or a charitable lead trust. As the names suggest, beneficiaries are paid first from a charitable remainder trust, with the balance going to a cited charity or charities. The charity is paid first in a charitable lead trust, then the beneficiaries get their shares of the remaining assets.

The grantor can claim a charitable income tax deduction in the year the transfer is made to the irrevocable trust if the initial funding of assets into the trust is made while they're still alive. The estate will receive the charitable estate tax deduction instead if the initial transfer of assets into a charitable trust doesn't occur until after the grantor's death.

The Bottom Line

When you're setting up a living trust, consider carefully how certain you are about the terms, assets, and beneficiaries. If you are ready to grant your property without hesitation, you may wish to take advantage of some of the tax benefits that come with an irrevocable trust. If you are not 100% sure about the grant, or if there's the possibility that things might change down the road, a revocable trust may be best for you. Either way, an attorney or other estate planning professional can help you set up the trust instrument in a way that best works with your wishes.