Revocable vs. Irrevocable Trusts
Contrary to popular belief, trusts can be quite a useful estate planning option for a wide range of people—not just the world’s wealthiest.
As a refresher, a trust is a private legal document and entity created by a person (the grantor) to hold designated assets of their estate (real estate, bank accounts, etc.). The grantor picks a trustee to manage the trust’s assets and make sure that they are delivered to its beneficiaries.
There are two main types of trusts:
In a revocable trust, the grantor maintains control over their assets while alive. You can make changes to the trust at any point, including the ability to take back assets from the trust and even revoke it completely.
An irrevocable trust is much more rigid, but offers potential tax benefits and added protections. When a grantor creates an irrevocable trust, they give up ownership of the assets placed into it. In most cases, any changes to the trust can only be made if all beneficiaries agree to them.
In short, the difference is in the name—one can be revoked and one can’t. Both trusts offer estate planning benefits for the grantor and beneficiary.
Revocable trusts are often used when someone wants to pass assets (like an inheritance) to their children without having to go through a lengthy probate process.
Benefits: Ensures assets are transferred to the beneficiary; bypasses probate; can hold certain investment/retirement accounts that irrevocable trusts can’t.
Limitations: No tax benefits (estate taxes still apply); assets are still considered part of the grantor’s estate, so they aren’t protected from lawsuits and creditors.
Irrevocable trusts are commonly used for potential tax benefits.
Benefits: Assets in the trust are not considered part of the grantor’s estate, which can eliminate estate taxes and protects the assets from lawsuits and creditors against the grantor.
Limitations: Grantor loses control over assets; very difficult to make changes to or revoke the trust.