Revocable Vs Irrevocable Trust: Differences, Pros & Cons

A revocable trust is also called a living trust. It is a legal document you create that allows you to separate the ownership of your property from the control of your property. This is helpful to facilitate the transfer of assets after your death and to ensure your assets can be managed in case you become incapacitated.

When you create a revocable trust, you are called the grantor. You create a trust document which specifies who will serve as the trustee that’s in charge of managing trust assets. You can name yourself as the trustee, but should also select a successor trustee who takes charge after your death or in case of your incapacity. You’ll also name beneficiaries who benefit from the trust.

You then transfer legal ownership of your property into the trust and the trust becomes the legal owner. The trustee manages the trust property, which means you’ll retain control if you named yourself as the trustee. The successor trustee will begin managing trust assets when you can’t and will facilitate the transfer of trust assets to beneficiaries after your death in accordance with your wishes.

Revocable trusts, as the name suggests, can be revoked. You can change the terms of the trust or cancel it whenever you want.

An irrevocable trust is also a legal document that you create that separates ownership from control. But it is very different from a revocable trust.

When you create an irrevocable trust, you generally name someone else as trustee besides yourself. You cannot change anything about the trust except in very limited circumstances. If you want to cancel or modify the trust, you usually need court permission and approval of all beneficiaries.

Both a revocable and irrevocable trust can help you to facilitate a transfer of assets outside of probate. However, there are some major differences between a revocable trust and an irrevocable trust, which you must be aware of when deciding how to set up a trust and which type of estate planning tool is right for you.

These differences have to do with the level of control you must give up, as well as the level of protection each trust provides for your assets.

Flexibility and Control Over Assets

When you create a revocable trust, you still essentially retain complete control over your assets held within the trust. You can modify or change the trust terms whenever you want. You can use or sell the assets as you wish.

This is not the case with an irrevocable trust. Changing any of the terms of the trust is almost impossible so you are giving up a lot of control over your assets if you choose to use this estate planning tool. And since you are not the trustee, you cannot personally manage the assets in the trust.

Protection for Assets

With an irrevocable trust, you get much more protection for assets. Since you have largely given up control over the trust assets and cannot just access them at will, there is more protection from creditors. You may also be able to protect irrevocable trust assets from estate tax.

And if you follow the correct processes (such as creating a trust well in advance), the assets held within your trust may not count when determining if you are eligible to have Medicaid pay for nursing home care for you.

With a revocable trust, the fact you retain control over assets means you can lose them to creditors and the trust assets can prevent you from qualifying for Medicaid nursing home coverage, which is available only to people with limited resources.

And while your revocable trust assets pass outside of probate, they are generally still considered part of your taxable estate and as a result, it is possible estate tax will have to be paid on them.

Here are some examples highlighting the difference between revocable and irrevocable trusts:

• Revocable Trust. Revocable trusts can be excellent estate planning vehicles, allowing you to avoid probate and distribute your assets to your loved ones according to your wishes. A revocable trust can also help you plan for the event of your incapacitation, as it allows a successor to step in and manage your assets. During your lifetime though, you can use and spend your assets as you normally would.
• Irrevocable Trust. Assets placed in an irrevocable trust are removed from your control and you can no longer spend or use them. Irrevocable trusts can be a good choice for Medicaid planning and to protect a loved one with a special needs trust. Any assets moved into the trust are no longer considered part of the estate and may not be counted against Medicaid or Social Security eligibility requirements. In certain circumstances, establishing irrevocable trusts may also reduce tax liabilities.

A revocable trust has some pros and cons to consider.

Advantages of a Revocable Trust

The biggest benefits of a revocable trust include the following:

• You can act as your own trustee
• You can transfer assets outside of probate
• Your successor trustee can manage assets in case of your incapacity
• The trust is usually simple to create
• You can modify or cancel your trust easily at any time

Disadvantages of a Revocable Trust

The biggest downsides of a revocable trust include the following:

• Your trust assets aren’t protected from creditors
• You may not qualify for needs-based Medicaid coverage for a nursing home because the assets held in trust are still counted as resources when determining benefits eligibility
• Your estate may have to pay estate taxes even on assets held in a revocable trust

Ultimately, you should consider whether your primary goal is to protect your assets or to retain the flexibility to manage them as you see fit.

There are also both advantages and disadvantages of an irrevocable trust.

Advantages of an Irrevocable Trust

Some big advantages of an irrevocable trust include the following:

• You have stronger protection from creditors
• You may be able to qualify for Medicaid for nursing home care
• You can transfer assets outside probate and avoid estate taxes on trust assets even in large estates

Disadvantages of an Irrevocable Trust

Some downsides of an irrevocable trust include the following:

• You will give up much more control over your financial affairs
• Additional tax returns may need to be filed for the irrevocable trust, which can add cost and complexity
• Irrevocable trusts may be more difficult to create and are nearly impossible to modify

Work with an experienced estate planning lawyer to determine whether a revocable trust vs. an irrevocable trust is best for your situation.

Both revocable and irrevocable trusts have significant benefits, and each can play a role in a comprehensive estate plan. The best option for anyone considering creating either type of trust is to get help from a qualified legal professional.

An estate planning lawyer can assist with exploring different trust options, drafting an enforceable trust and making a comprehensive plan to protect your loved ones and your wealth after you are gone.