The Differences Between a Revocable and an Irrevocable Trust
In medieval times, the legal vehicle we know today as a trust was already well‑established — the concept itself dates back to Ancient Rome.
Trusts are an integral component of civil law, particularly in the areas of estate planning and wealth transfer, yet the language used in their creation and execution can be both complex and obscure.
For example, the grantor is the person who forms a trust with their own assets and transfers those assets or property to the trustee. You might hear the grantor referred to by other names (like trustor, settlor, or founder), but they all mean the same thing in legal terms.
Next is a pair of similar‑sounding terms related to the type of trust being formed: revocable and irrevocable. Let’s take a deeper dive into each.
- A trust is revocable if its grantor reserves the right to amend, modify, or cancel it (i.e., revoke it) while alive and of sound mind.
- A trust is irrevocable if its grantor specifies that, once created, no one, not even the grantor themself, can amend, modify, or revise it. As a rule, a revocable trust becomes irrevocable when its grantor dies.
Each type of trust has a distinct purpose and many variations of it. Before creating your trust, find an experienced retirement advisor who can talk with you about your goals and specific circumstances.
Now, let’s look at a few of the most common types of trusts.
A revocable living trust (also called an inter vivos trust) is probably the most common form of personal trust. In addition to your right to amend, modify, or cancel a revocable living trust, you maintain the right to freely access its income and principal (should you want to add or remove assets) at any time.
A living grantor has almost total control over a revocable living trust. You can name yourself as trustee or co‑trustee alongside a spouse, family member, or professional trustee.
The income and gains produced by a revocable living trust are taxed to the grantor, but no gift tax is incurred simply by funding the trust.
Here are three common reasons why people choose to form a revocable living trust:
- Should you become incapacitated, a revocable living trust can seamlessly continue to manage your affairs and provide resources for care and support for the rest of your life.
- A revocable living trust offers a stable vessel for professional investment management to continue through this transition and beyond your lifetime for beneficiaries.
- Following your death, a revocable living trust can supplant a traditional will to settle your estate. Since you’ll be able to bypass probate administration and accounting, it can also help protect family privacy.
A revocable living trust gives you the right to amend, modify, or cancel it, and you maintain the right to freely access its income and principal at any time.
An irrevocable trust irreversibly transfers away ownership of assets and is typically used for gifting strategies, estate tax planning, and other specialized purposes.
An irrevocable trust — which is often managed by a professional trustee — is typically used for gifting strategies, estate tax planning, and other specialized purposes. Unlike a revocable trust, an irrevocable trust is its own taxable entity and will require the filing of a separate tax return. When a grantor funds an irrevocable trust, they are irreversibly transferring away ownership of assets (as the separate tax identity affirms).
So why would you do this? Depending on your circumstances, an irrevocable trust can prove quite beneficial:
- Irrevocable trusts are commonly used to remove assets from large personal estates, legally sheltering them from estate and gift taxes.
- An irrevocable trust allows you to make a gift in order to reduce the taxable value of your estate while controlling how that gift may be used. An example of this would be ensuring that a gift you make to a minor child will be protected or professionally managed until that child becomes an adult.
- Should you have a disabled child, an irrevocable trust can ensure that your child is supported financially.
When finding the right type of trust for you and your family, it’s essential to look at all aspects of your personal and financial life before making a decision. That’s where I can help, and I’d love to offer my assistance to you. If you have any questions, please send me an email, contact us online, or give me a call today.