Revocable vs Irrevocable Trusts: Understanding the Key Differences for Smarter Estate Planning

Written by David Faloni Jr, ESQ. and Mahima Shumi, MBA

Introduction to Trusts

What is a trust?

A trust is a legal arrangement where a person who is referred to as the grantor, transfers assets to a trustee, who holds and manages them for the benefit of a beneficiary, according to the grantor’s instructions.

Different types of trusts:

Some of the popular types of trusts are the revocable and irrevocable trusts. Both have similarities and differences which serve different purposes. Call Faloni Law Group today to seek guidance on which type of trust would be the best for you.

Key Differences

Who controls it?

In a revocable trust, the grantor has full control over the trust and can modify and or revoke it at any given time. The grantor cannot modify or revoke a trust once it’s established if it’s an irrevocable trust. However, there is always some flexibility to cancelling or amending it. There are always rare cases where with consent from beneficiaries or court order, the trust can be revoked or modified. It is recommended to contact legal counsel for further advisement.

Ownership of Assets:

A grantor still owns the assets in the trust in a revocable trust. The grantor can continue on to take it back or change the terms of the trust. This type of flexibility usually is not given to irrevocable trusts. With an irrevocable trust the assets are no longer owned by the grantor but rather the trust owns the assets. The trust is looked at as though they are a separate entity not controlled by the grantor.

Tax Implications:

In the instance of a revocable trust, any income that is generated by the trust, the grantor must continue to pay taxes on it. Legally the trust is considered a part of the grantor’s estate. In the instance of an irrevocable trust, since the trust is seen as its own person, it’s considered a separate tax entity. The trust itself may have to pay taxes on the income generated from it, possibly leading to higher tax rates. Irrevocable trusts can be designed as part of grantor’s estate which will be taxed to grantor. Or it can be designed as a separate entity for estate tax purposes & be taxed as a separate entity. It is suggested to contact legal counsel for further explanation.

Asset Protection:

Assets in a revocable trust are considered a part of the grantor’s estate. Therefore, the assets are not protected from creditors or Medicaid claims. Irrevocable trusts are seen as their own separate entity. If the trust is structured properly, it may be protected from such claims.

Probate Issues:

Assets are transferred directly to beneficiaries in the instance of the grantor’s death for revocable trusts. It overall avoids probate. For an irrevocable trust, probate is also avoided mainly due to the assets already being legally owned by the trust. The trust is seen as its own person.

Beneficiary Access:

For a revocable trust, beneficiaries are only to get access upon the grantor’s death. The beneficiaries must follow the terms of the trust. For an irrevocable trust, beneficiaries may have stricter and more limited access to assets. However, both trusts can be structured for beneficiaries to get limited access to funds for protection purposes, essentially to protect the beneficiaries. It is all dependent on the terms of the trust.

Potential Changes to Type of Trust

Death of Grantor

In the instance that a trust is revocable, and the grantor of the trust is deceased, the trust then becomes irrevocable. Beneficiaries of the trust then must abide by the terms left within the trust. No modifications or changes can be made except in special circumstances granted by the court. Advisement for legal professionals is recommended to evaluate circumstances on a case-by-case basis.