5 Important Differences Between Revocable vs. Irrevocable Trusts

MANAGE MONEY - TAXES
Irrevocable trusts provide more protections for assets, but they also come with more restrictions and greater complexity.
Updated April 3, 2023
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Both revocable and irrevocable trusts are legal arrangements that separate ownership of property and legal control of that property, including real estate. Both types of trusts are common estate planning tools.

So what are the differences between revocable vs. irrevocable trusts?

Revocable trusts are easier to create and provide more flexibility, but they do not offer protection from creditors or shield any part of your estate from taxes. Irrevocable trusts require you to give up more control over assets, and they’re more complex to create and manage. But irrevocable trusts provide broader protection for your money and property.

To decide whether a revocable vs. irrevocable trust is right for you, read on to learn the key differences between them.

In this article

1. Access to assets

One of the biggest differences between a revocable vs. irrevocable trust relates to asset management.

With both types of trusts, legal ownership of assets is transferred to the trust. But with a revocable trust, the trust can still be modified or changed. As a result, the creator of the trust — called the grantor — still retains control over the money or property they put into the trust. They can access any of the assets in the trust whenever they want or need to.

With an irrevocable trust, the grantor cannot change the trust or end it once it has been created. After property has been transferred to the trust, and the trust becomes the owner of it, the grantor doesn't have an ownership interest or control over the property any more. The trustee manages the assets within the trust and distributes them according to the terms of the trust when it was created.

An irrevocable trust can make it much more complicated to figure out how to manage your money due to this loss of control.

2. Ease of setup

There is a lot more complexity associated with irrevocable trusts vs. revocable trusts. Irrevocable trusts can be more difficult to set up and more complicated and expensive to maintain. Exemptions for irrevocable trusts can be made under very limited circumstances, but it’s very difficult to modify without taking extra steps, such as getting the consent of beneficiaries or probate court approval.

3. Protection from creditors

One key part of your retirement planning process may involve trying to protect assets from potential creditor claims. An irrevocable trust can do that, but a revocable trust cannot.

Because the trust creator retains complete control over assets in a revocable trust, any assets the trust owns are not protected from creditors. If a creditor makes a successful claim against the trust creator, the creditor would generally be able to access the property in the trust in order to satisfy the judgment.

With an irrevocable trust, assets are beyond the reach of creditors because the trust creator has no authority to transfer the money or property out of the trust.

4. Taxes

Irrevocable trusts can have tax benefits because they reduce the grantor’s taxes. Revocable trusts can contribute to the grantor’s taxable income.

It's important to understand the implications of revocable vs. irrevocable trusts on taxes. Although the best tax software can make it easier to understand tax rules applied to trusts, knowing the basics on this subject before making a trust can help you decide which is right for you.

With a revocable trust, any income that the trust generates is going to pass through to the trust creator because the trust creator still has control over the assets. This means the creator will report the income on their personal income tax return.

With an irrevocable trust, the trust will have its own tax ID number and the trust will need to file a 1041 form. The specifics of when and how taxes are paid will depend on whether the trust is a grantor or non-grantor trust for income tax purposes.

If the trust is a grantor trust, then it is a disregarded entity. That means the grantor pays taxes and claims any losses. If the trust is a non-grantor trust, the trust pays taxes. But it can deduct income sent to trust beneficiaries, and the beneficiaries will have to claim any received funds on their tax returns.

Grantor trusts are those in which the trust creator is treated as the owner of any assets in the trust, or in which the trust creator retains certain powers, such as the power to add beneficiaries. In non-grantor trusts, the creator relinquishes control over assets.

5. Estate tax protection

Irrevocable trusts protect against federal estate taxes because assets held in an irrevocable trust are not considered part of your taxable estate after you die. Assets held in a revocable trust, on the other hand, do not pass through probate but are still considered part of your taxable estate, so your loved ones may be subject to federal estate taxes.

Revocable vs. irrevocable trusts: Which should you get?

If you want to retain more control over trust assets and don't mind the risk of creditor claims or possibly owing estate taxes on a large estate, a revocable trust may be best. But if you are OK with giving up more control over your assets, paying more to create the trust, and dealing with more legal complexities, then you may want an irrevocable trust that can provide broader asset protection and help avoid estate tax.

How do you set up a trust?

Setting up a trust involves legal paperwork and transfer of assets. You will need to choose a trustee to manage estate assets. You can choose yourself to be the trustee during your lifetime, but will need to name a successor trustee to take over after your death, or if you become incapacitated. You will also need to name beneficiaries as part of the trust document. And you will need to transfer ownership of assets to the trust.

This process can be complex, so it’s often best to talk with an estate planning attorney or financial advisor for help.

FAQ

What is a trust fund?

A trust fund is a legal entity that you can create and transfer money or property into. The trust becomes the owner of the assets that the trust creator (called the grantor) transfers to the trust.

A trustee manages the property on behalf of beneficiaries of the trust. Trust funds are often used in estate planning, and they can facilitate the transfer of assets outside of the probate process and give the grantor more control over when and how assets are distributed.

Are most trusts revocable or irrevocable?

Both revocable and irrevocable trusts are common, and they each serve their own purpose. Revocable trusts allow the grantor more control over trust assets, and the trust can be changed or ended. 

Irrevocable trusts are asset protection trusts, and they cannot be modified or ended without complex legal intervention, so the grantor must give up more control.

What’s the difference between a living trust and a will?

A will is used to transfer assets after death through the probate process. A last will and testament allows its creator to specify who should inherit money or property. But it gives the creator little control over the details or what is done with the assets that are inherited.

A living trust is created during your lifetime and facilitates the transfer of assets outside probate. It gives a trustee responsibility for managing assets on behalf of beneficiaries. The grantor — the person who creates a living trust — can have more control over how assets are managed and when they are distributed.

You can have a revocable living trust or an irrevocable living trust.

Bottom line

Creating a trust can be an important part of preparing for the future. If you want to explore whether a revocable vs. irrevocable trust is best for you, consider talking with a trustworthy financial advisor who can help you put the right estate planning and asset protection tools in place for your specific situation.

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Author Details

Christy Rakoczy Christy Rakoczy has a Juris Doctorate from UCLA Law School with a focus in Business Law, and a Certificate in Business Marketing with an English Degree from The University of Rochester. As a full-time personal finance writer, she writes about all things money-related but her special areas of focus are credit cards, personal loans, student loans, mortgages, smart debt payoff strategies, and retirement and Social Security. Her work has been featured by USA Today, MSN Money, CNN Money and more, and you can learn more at her LinkedIn profile.

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