Revocable trust versus irrevocable trust

Estate Planning

Revocable vs. Irrevocable Trusts: What’s the Difference?

Trusts can help you plan how your assets are managed during your lifetime and passed on in the future. But not all trusts work the same way.

Estate planning isn’t only about deciding who receives your property after you die. It can also help you decide who will manage your finances if you become unable to do so, how your assets will be transferred, and how much of that process may have to go through probate. One tool you may encounter while making an estate plan is a trust. Trusts can sound complicated, but the basic idea is fairly simple: a trust is a legal arrangement for holding and managing property for the benefit of specific people. Two common types are revocable trusts and irrevocable trusts.
The biggest difference is right in their names: One generally allows you to change your mind. The other generally does not.

What Is a Revocable Trust?

A revocable trust, often called a revocable living trust, is created during your lifetime. You transfer assets into the trust and establish instructions for how those assets should be managed. In many cases, you can name yourself as the trustee and continue managing the property much as you did before. Because the trust is revocable, you can generally change its terms, add or remove assets, change beneficiaries, or cancel the trust while you are living and able to make those decisions. You can also name a successor trustee who can step in to manage assets in the trust if you become unable to manage them yourself. After your death, the successor trustee can follow the instructions you established for distributing the trust’s assets.

Why Would Someone Create a Revocable Trust?

One of the best-known benefits is avoiding probate for assets properly placed in the trust. Probate is the court-supervised process of settling an estate and distributing property after someone dies. Depending on the circumstances and state, probate can involve court filings, expenses, delays, and public records. Assets properly held in a revocable trust can generally be administered according to the trust instead of going through probate.

More Privacy

Probate proceedings may become part of the public record. Property passing through a trust can generally be handled more privately.

Continuity

A successor trustee can be named in advance to manage trust property if you become incapacitated.

Control

You determine how trust assets should be managed and distributed while retaining the ability to change those instructions during your lifetime.

Family Flexibility

A trust can include instructions for distributing property over time rather than giving a beneficiary everything at once.

A Trust Has to Be Funded

Creating the trust document isn’t necessarily enough.

The assets you want governed by the trust generally need to be properly transferred or titled to the trust. If you create a trust but leave assets in your individual name, those assets may still have to go through probate.

Some assets also pass according to beneficiary designations or have special rules, so changing ownership isn’t something you should do blindly. An estate-planning attorney or tax professional can help determine how individual assets should fit into your overall plan.

What Doesn’t a Revocable Trust Do?

Revocable trusts have benefits, but they aren’t magic shields for your money. Because you generally retain control of the property and can revoke the trust, a revocable trust usually does not protect your assets from your creditors during your lifetime. Creating one also does not automatically reduce your income or estate taxes. That’s an important distinction between revocable trusts and certain types of irrevocable trusts.

What Is an Irrevocable Trust?

An irrevocable trust generally cannot be revoked or freely changed after it has been established. With a revocable trust, you retain substantial control. With an irrevocable trust, you generally give up some rights and control over assets transferred to the trust.

Why would someone voluntarily do that?

Because giving up control can accomplish things that retaining complete control cannot. Depending on the type of trust, its terms, applicable law, and an individual’s circumstances, irrevocable trusts may be used for purposes such as estate-tax planning, asset protection, charitable giving, providing for family members, or certain long-term-care planning strategies.

Irrevocable trusts come in many forms, and their tax treatment can vary. This is definitely an “ask an attorney” area rather than a do-it-yourself financial strategy.

Revocable vs. Irrevocable: A Quick Comparison

Feature Revocable Trust Irrevocable Trust
Can it be changed? Generally, yes Generally much more difficult or restricted
Do you retain control? Generally, yes Generally, you give up significant control
Can assets avoid probate? Properly held trust assets generally can Properly held trust assets generally can
Creditor protection? Generally no protection from your own creditors Certain structures may provide protection
Estate-tax planning? Generally does not remove assets from your taxable estate Certain trusts may provide estate-tax benefits
Complexity Typically less complex Often more complex
Common goal Flexibility, continuity, privacy, and probate planning Specialized estate, tax, asset-protection, or legacy planning

The Pros and Cons of a Revocable Trust

Potential Benefits

  • You generally retain control of your assets.
  • You can change the trust as your circumstances change.
  • Properly held assets can generally avoid probate.
  • A successor trustee can manage trust assets if you become incapacitated.
  • It may provide greater privacy when assets are distributed.

Potential Drawbacks

  • Establishing a trust can involve legal costs and paperwork.
  • Assets must be properly coordinated with the trust.
  • It generally does not protect your assets from your own creditors.
  • It does not automatically provide estate-tax savings.

Which Trust Is Right for You?

There isn’t one answer for everyone. A younger family planning for children may have very different needs from a retired couple with significant assets. Someone who owns a business may have different concerns from someone whose estate consists primarily of a home and retirement savings. And some people may not need a trust at all. The important thing is to have an estate plan that reflects your family, your assets, and your wishes — and to keep that plan current as life changes. An estate-planning attorney can help you determine whether a revocable trust, an irrevocable trust, a will, or another combination of planning tools makes sense for your situation.

Your AGCU Accounts Are Part of the Plan

If you’ve already established a trust, don’t forget about the financial accounts that are supposed to be part of it. Account ownership and beneficiary designations should work together with the estate plan you’ve created. A trust can only control property that has actually been placed in — or otherwise properly coordinated with — the trust. AGCU can help with the banking side of the process. If you have an established trust and need information about titling eligible AGCU accounts in the name of your trust, talk with an AGCU representative about the documentation we’ll need.

Your attorney creates the legal plan. We can help make sure your AGCU accounts are set up to work with it.

Important: This article is for general educational purposes only and is not intended as legal, tax, or estate-planning advice. Trust laws and tax consequences vary based on the type of trust, its terms, applicable state law, and individual circumstances. Consult a qualified attorney and tax professional regarding your specific situation.

Sources

Consumer Financial Protection Bureau — What is a revocable living trust?

Internal Revenue Service — Trust Tax Information