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Revocable Trust vs. Irrevocable Trust

There are many important decisions that need to be made when creating a trust, and one of the most crucial is whether to set up a revocable trust vs. irrevocable trust. This decision can have a significant impact on your estate plan and should not be made lightly.

In this article, we will explore the key differences between revocable and irrevocable trusts so that you can make an informed decision about which type is right for you.

Revocable Trusts (or Living Trust) Overview

Revocable trusts and living trusts are the same thing, but usually people interpret them as different terms. A revocable trust is a type of trust that allows the owner or grantor to revoke the terms he or she sets in first instances. Therefore, the grantor (meaning, the person that setup the trust) can make changes to the trust as needed, which is mostly helpful if circumstances change for the owner.

Irrevocable Trusts Overview

An irrevocable trust is a type of trust that cannot be amended or revoked by the person who created it. Once it is created, it is set in stone. This is helpful in situations where you want to ensure that your estate plan is permanent. But in exchange for making your trust permanent you can gain significant tax, estate planning and asset protection benefits.

Revocable Trust vs. Irrevocable Trust Differences

  1. Revocable trusts are generally simpler to set up. A living trust allows you to you change the trust terms if your circumstances change. Instead, with an irrevocable trust, you can’t change any detail, no matter what happens.
  2. Revocable trusts can be amended or canceled at any time, while irrevocable trusts cannot.
  3. Revocable trust assets are considered part of the grantor’s estate for estate tax purposes. The estate tax is a tax on money and property that someone leaves behind when they die. The estate tax is paid by the person who inherits the money or property. Money and property that is put into a revocable trust is still considered part of the grantor’s estate when they die, which means it might be taxed when it goes to their heirs. Money and property that is put into an irrevocable trust is not considered part of the grantor’s estate when they die, which means it will not be taxed when it goes to their heirs.
  4. Revocable trusts can be used to shelter assets from creditors, while irrevocable trusts cannot. In other words, these trusts protect your money from people who might want to take it away from you. Once your money is put into a revocable trust, it is safe and no one can touch it.
  5. Revocable trusts allow the grantor to remain in control of the trust assets, while irrevocable trusts do not.
  6. Both of these trusts offer different estate tax benefits. Irrevocable trusts are more suitable from this perspective, since when you put your property into these trusts it’s no longer part of your estate when you die. In other words, the property will not be taxed when it goes to your heirs. Instead, when you put your property into a revocable trust, it is still part of your estate when you die. That means that it might be taxed when it goes to your heirs.
  7. Revocable trust income is taxable to the grantor, while income from an irrevocable trust is not taxed until it is distributed to beneficiaries
  8. An irrevocable trust must must file a separate tax return, while revocable trusts don’t necessarily file it separately.
  9. Revocable trust decisions must still be made after the death of the grantor, while trustees make all decisions with an irrevocable trust.
  10. Revocation of a revocable trust will typically involve dissolving. And as you might assume, irrevocable trusts are not dissolvable.

FAQs

Why do people use irrevocable trusts?

People use irrevocable trusts for different reasons. Some people use them to protect their money from creditors, while others use them to avoid estate taxes. Irrevocable trusts also allow the grantor to remain in control of the trust assets, which is a benefit that revocable trusts do not offer.

What are the negatives of an irrevocable trust?

Once an irrevocable trust is created, it set forever. This might not be helpful your circumstances change after you created the trust. For example, you might want to be able to change the trust if something happens to you and you can’t manage the trust anymore.

Are most living trusts revocable or irrevocable?

Most living trusts are revocable, but some people use irrevocable trusts. It’s always best to decide according to your specific situation and the goals you have for the trust.

Next Steps

Want to learn more about trusts? Here’s a blog post we shared on trust funds and how to set them up. However, if you have specific questions, you can schedule a meeting with our team and we’ll help you out!

About Valur

We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy.