The Difference Between Revocable & Irrevocable Trusts
There are significant differences between revocable and irrevocable trusts. The specific terms of a trust are what dictate the outcome in any particular situation. Below are some of the major general differences between revocable and irrevocable trusts:
General Differences
Revocable Trusts
Summary: with a revocable trust, the grantor (creator) of the trust retains ownership and control of all trust assets, and can amend or revoke the trust at any time.
Common Use for Revocable Trusts: revocable trusts are often used for lifetime asset management, avoiding probate, estate tax planning, and simplifying asset distribution after death.
Irrevocable Trusts
Summary: an irrevocable trust cannot be modified or revoked by the grantor without the express permission of the beneficiaries and/or the court. For tax purposes, the grantor is typically no longer considered the owner of assets transferred into an irrevocable trust.
Common Use for Irrevocable Trusts: irrevocable trusts are most often used for estate tax reduction planning, asset protection, Medicaid planning, gift or charitable planning, and special needs planning.
Control & Flexibility
Revocable Trusts
Grantor Control: the grantor (creator) of a revocable trust retains the right to amend or revoke the trust at any time.
Flexibility: revocable trusts are designed to be amended to account for changes in life circumstances. Terms of the trust can be easily altered or amended to address asset distribution and other estate planning issues.
Irrevocable Trusts
Less Control over Irrevocable Trusts: the grantor gives up ownership of the assets transferred to an irrevocable trust, and usually does not have the ability to revoke (cancel) the trust or take back possession of assets placed in the trust.
Less Flexibility: changes or amendments to irrevocable trusts usually will require beneficiary consent and/or court approval, and cannot be initiated by the grantor (creator) of the trust.
Tax Implications
Revocable Trusts
Tax Treatment: for tax purposes, assets in a revocable trust are treated as if they are owned directly by the grantor (creator). Assets in a revocable trust are taxed as part of the grantor's estate after death.
Tax Filing Requirements for Revocable Trusts: since the assets in a revocable trust are treated as if they are owned by the grantor, any income or taxable gains / losses generated by the trust assets during the grantor’s lifetime are reported on the grantor’s individual tax return.
Irrevocable Trusts
Tax Treatment: for tax purposes, assets transferred into an irrevocable trust are considered to be owned by the trust itself, or by the beneficiaries of the trust - but there are several key exceptions to this rule that require careful examination by an attorney or CPA.
Income Tax Reporting for Irrevocable Trusts: the trust itself or the beneficiaries may be responsible for filing and paying taxes. There are also special situations where trust income remains taxable to the grantor while the principal of the trust is owned by the beneficiaries. Due to the complexity of these rules, consult an attorney for specific guidance.
Asset Protection
Revocable Trusts
No Creditor Protection from a Revocable Trust: revocable trusts are not designed to protect assets from creditors. Assets in a revocable trust are treated as owned by the grantor and can be reached by creditors during a grantor’s lifetime.
Different Rules May Apply After a Grantor’s Death: depending on the situation, some revocable trusts convert to irrevocable trusts when the original grantor (creator of the trust) dies. Post-death creditor issues are extremely complex. Consult an attorney about your specific situation.
Irrevocable Trusts
Increased Creditor Protection with an Irrevocable Trust: depending on the terms of the trust and the powers retained by the grantor (creator), assets in an irrevocable trust are considered to be owned by the trustee or the trust beneficiaries, and not by the grantor.
Legal Claims: assets in an irrevocable trust are sometimes protected from creditors of the grantor or trust beneficiaries - depending on the type of claim and terms of the trust. Creditor claims against irrevocable trusts are extremely complex, consult an attorney about your specific situation.
Probate & Privacy
Revocable Trusts
Probate & Estate Taxes for Revocable Trusts: Unlike property that passes under a Last Will & Testament, trust-owned assets do not require probate court administration prior to distribution after a grantor’s death. However, assets in a revocable trust are still treated as part of the grantor’s estate for tax purposes.
Privacy & Efficiency of Revocable Trusts after Death: Revocable trusts offer privacy and ease of administration after a grantor’s death, whereas probate court proceedings are public record and often take several months or even years to complete.
Irrevocable Trusts
Probate & Estate Tax Implications of Irrevocable Trusts: Assets in an irrevocable trust also avoid probate. Depending on the terms of the specific trust, assets that have been transferred to an irrevocable trust can avoid estate taxes after a grantor’s death.
Privacy and Irrevocable Trusts: Irrevocable trusts also offer the same privacy and streamlined post-death administration as revocable trusts. Irrevocable trust assets also avoid the public probate process.
