About 33% of Americans have a will or estate plan of some kind, according to a Caring.com survey. Individuals often encounter the terms “irrevocable trust” and “revocable trust” when estate planning. Both types of trusts serve as legal arrangements that can manage assets and provide for the distribution of property.
However, they differ significantly in terms of flexibility, control and the protection they offer.
Control and flexibility
One of the primary distinctions lies in the level of control the trust creator retains. In a revocable trust, as the name suggests, the grantor (the trust creator) maintains the power to make changes, modify beneficiaries or even revoke the trust entirely. This flexibility ensures that the grantor can adapt the trust to changing circumstances, such as adding or removing assets or adjusting the distribution plan.
Conversely, an irrevocable trust is more rigid. Once grantors establish trusts, they cannot change the terms. This lack of flexibility may seem restrictive but serves a purpose, especially in situations where the grantor seeks to protect assets from creditors or provide for beneficiaries with specific conditions.
Asset protection is another key factor distinguishing the two types of trusts. In a revocable trust, since grantors maintain control and ownership of the assets, grantors remain vulnerable to creditors and legal claims. The assets within a revocable trust are essentially an extension of the grantor’s estate.
On the contrary, an irrevocable trust shields assets from such threats. By relinquishing control and transferring ownership to the trust, the grantor places a legal barrier between the assets and potential creditors. This protection can be particularly advantageous for preserving wealth for future generations or safeguarding assets from unforeseen liabilities.
Estate taxes represent another aspect of estate planning and trust planning. Revocable trusts do not offer any direct tax benefits since the assets are still part of the grantor’s estate. Irrevocable trusts, however, may provide potential tax advantages. Assets in an irrevocable trust may not go into a grantor’s taxable estate, potentially reducing the overall estate tax liability.
The choice between an irrevocable trust and a revocable trust depends on individual circumstances, objectives and concerns. Understanding these differences is necessary for estate planning.