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There are positives and negatives to both revocable trusts and irrevocable trusts. Irrevocable trusts are most often used in specific scenarios such as avoiding creditors or to protect a beneficiary from losing their disability benefits. A revocable trust is generally more common because it offers greater control and flexibility for the creator.
A trust is a legal entity overseen by a trustee that holds property and distributes it to the trust’s beneficiaries. Revocable trusts offer more active control but fewer protections. Irrevocable trusts have more tax and liability benefits, but the creator of the trust has less control over the assets.
Asset Ownership: The settlor, or the creator of the trust, maintains control of the assets within the trust
Modifications: The settlor can make changes to the trust.
Taxes and Creditors: Assets are part of the settlor’s estate and subject to estate taxes. Assets are also not protected from potential lawsuits.
Asset Ownership: The trust itself owns the assets, removing them from the settlor’s estate.
Modifications: No changes can be made without the permission of the beneficiaries.
Taxes and Creditors: Assets are not part of the settlor’s estate, which may have tax benefits. Assets are generally protected from creditors.
| Revocable Trusts | Irrevocable Trusts | |
|---|---|---|
| Asset Ownership | The settlor, or the creator of the trust, maintains control of the assets within the trust. | The trust itself owns the assets, removing them from the settlor’s estate. |
| Modifications | The settlor can make changes to the trust. | No changes can be made without the permission of the beneficiaries. |
| Taxes and Creditors | Assets are part of the settlor’s estate and subject to estate taxes. Assets are also not protected from potential lawsuits. | Assets are not part of the settlor’s estate, which may have tax benefits. Assets are generally protected from creditors. |
The pros of a revocable trust include that they avoid probate, increase privacy, provide incapacity planning, can distribute property in a controlled manner, and can be changed later (similar to a will).
The only real negative of a revocable trust is that they do not inherently protect against debts and creditors. This tradeoff is usually worth it to keep the creator of the trust in control of the trust and its property. Most clients are uncomfortable giving up control of their own property and prefer the flexibility of revocable trusts. Revocable trusts can also be easily converted into irrevocable trusts, whether automatically upon the creator’s death, or specifically upon the occurrence of other events. In contrast, irrevocable trusts cannot easily be converted back to revocable trusts (or changed at all), without court intervention or the following of special procedures by all beneficiaries of the trust.
Irrevocable trusts are useful in specific scenarios because of the benefits they provide. An irrevocable trust provides potential creditor and debt protection if set up correctly and managed well by a good third-party trustee. They also avoid probate, increase privacy, provide incapacity protection, and hold and distribute property in a controlled way, like most trusts.
Irrevocable trusts can also prevent people with disabilities or special needs from losing their governmental benefits, by irrevocably passing control of the person’s assets to a third party trustee. This type of trust is often called a special needs trust.
The cons of irrevocable trusts lie in the fact that they cannot be changed easily once created, which can be burdensome and impractical in addressing the unpredictable nature of the future. For example, irrevocable trusts can be messy in divorces. It is difficult if a married couple is later trying to recover and divide a trust that they previously stated could not be altered and transferred property to the control of a third party.
Irrevocable trusts can be inconvenient and financially cumbersome if the economy, jobs, technology, or simply life changes in a way that causes the creators to have less money than they expected or different financial goals altogether. Furthermore, because the trust is now in the control of the trust and not the creator, the creator must place a large amount of faith in that person to do their job correctly and follow the creator’s wishes. The third party trustee may be a friend, family member, or company depending on the setting.
While irrevocable trusts can offer unilateral protection, they do so at the cost of flexibility and practicality. Many people who form irrevocable trusts regret doing so, when they or their family later wish to cancel their trust due to changes in circumstances. Situationally, they can be very helpful, but generally irrevocable trusts are not recommended for the average person.
The choice between an irrevocable vs revocable trust boils down to which is appropriate for your individual situation. For the average person, revocable trusts are the starting point and most commonly recommended type of trust. Revocable trusts are flexible and able to be changed or even terminated, and they also possess the other normal benefits of a trust such as avoiding probate.
Irrevocable trusts are used for specific situations, such as if the creator of the trust is receiving disability benefits or foresees potential large debts looming in his or her future. Irrevocable trusts can also help cut down or avoid the estate tax, but the vast majority of Americans are not facing the federal estate tax, due to its threshold for the tax to apply being so high, at $14 million for individual estates.
A revocable trust is a type of trust that can be changed or canceled by the creator after it is formed. This is in contrast to irrevocable trusts which generally cannot be easily changed or terminated after their creation. Revocable trusts are the most commonly used form of trusts in estate planning, due to the ease at which they can be changed.
An irrevocable trust is a type of trust that cannot be easily amended, changed, or canceled after its creation. Irrevocable trusts are more often used in specialized situations, such as creditor protection or medicaid planning. Because they cannot be changed once formed and usually prevent the creator from having any control over the trust, assets that are placed into it by the creator can be protected from the creator’s debts and creditors.
