Revocable Living Trust vs Irrevocable Trust: Key Differences (2024)

When creating your estate plan, you have many options available to you that enable you to keep control over your assets after you pass away.

One of the main ways to accomplish the goal of controlling the flow of your assets is a living trust, sometimes referred to as an inter vivos trust.

A living trust is a legal document that you create while you are still alive. Once your trust is created, all of your assets will be titled in the name of your trust by you, the trust owner. Those assets are then used or spent down by you while you are living.

At the time you pass away, the beneficiaries who are designated by you in your trust, then get access to your remaining assets, and those assets will be managed by the trustee you’ve chosen to succeed you.

The two types of Living Trusts are as follows:

1. Revocable Living Trust

In order to change your revocable living trust, you can have an amendment drawn up and added to the original trust.

Some of the main benefits of a revocable living trust are:

1. Probate Avoidance : If you have a revocable living trust in place, it doesn’t go through probate.
2. Protects Your Last Wishes: By utilizing a revocable living trust, you maintain complete control of your assets until you are physically or mentally no longer able to do so. If you have a history of Alzheimer’s or dementia in your family history, a revocable living trust can provide you with peace of mind.
3. Changes: You can change your revocable living trust at any time in the future.

The main disadvantage of a revocable living trust is that it does not protect you from creditors or lawsuits. Because you have control of everything in your trust and have access to the assets, you can still be sued for liability.

1. Expansive: Creating a revocable living trust can be more expensive than a simple will due to legal fees and document preparation.
2. Complexity: Managing a trust requires ongoing paperwork and record-keeping, which can be burdensome and time-consuming.
3. No Tax Benefits: Unlike some other estate planning tools, a revocable living trust does not offer direct tax advantages or reductions.
4. Limited Asset Protection: While it provides privacy, a living trust may not shield assets from creditors or lawsuits as effectively as an irrevocable trust.
5. Funding Challenges: Transferring assets into the trust can be overlooked or require constant updates as financial situations change.
6. No Medicaid Exemption: Assets in a revocable living trust are still considered when assessing Medicaid eligibility for long-term care.
7. Probate Avoidance Limited: In some cases, a trust may not entirely eliminate the need for probate, especially for assets not properly funded.
8. Lack of Court Supervision: While seen as an advantage by some, the absence of court oversight can lead to disputes or mismanagement.

2. Irrevocable Living Trusts

An irrevocable living trust is exactly like a revocable living trust except for one major difference – you cannot change an irrevocable trust at any time.

This means that you can’t change your assigned beneficiaries, trust successor, or who gets’s your grandfather’s pocket watch. Why? Because once those assets are in an irrevocable trust, they no longer belong to you, they belong to the trust.

While there are many types of irrevocable trusts available to you, we have listed below the three most common types. They include:

1. AB Trust: An AB Trust is most often utilized by spouses with high incomes to avoid having to pay estate taxes. This means that when the first spouse passes away, the trust splits into Part A and Part B. The money in Part A will remain in the trust, and the money in Part B will go to the surviving spouse. When the surviving spouse dies, both Part A and Part B of the trust will be distributed according to the terms of the trust.
2. Life Insurance Trust: In this type of irrevocable trust, the owner of a life insurance policy will place the policy in the trust so it will not be included in the estate. This is done for tax purposes and will still allow you to dictate who receives that money.
3. Charitable Trust: These types of irrevocable trusts are established to allow you to donate all or part of your estate to the charity or charities of your choice after you pass away. There are two types of charitable trusts: one that will distribute to your heirs first and gives the balance of your assets to charity, or one that pays the charity first and then distributes any remaining assets to your heirs.

Because revocable trusts are permanent, you need to ensure that the benefits outweigh the disadvantages. The benefits are:

1. Protection from Lawsuits: If your irrevocable trusts contains all your assets, then your trust actually owns your assets – not you. This means that any liability lawsuit cannot go after your assets in your revocable trust.
2. Estate Tax Reduction: Because you no longer own any asset in the irrevocable trust, it cannot be taxed when you pass away.
3. Gives You Access to Government Programs: In order to be eligible for some programs, if you have a disability or are a senior adult, there are strict rules about income levels for some government programs. If you have an irrevocable trust, it can actually lower your taxable income so you or a loved one can remain in the government program.

The downside of an irrevocable trust is that you no longer own anything in the trust, if you want to change anything, you have to go through a legal process.

1. Loss of Control: Once established, you cannot change or revoke an irrevocable trust, limiting your control over the assets held within it.
2. Limited Modifications: Making amendments to an irrevocable trust can be complex and often requires the consent of all beneficiaries.
3. Tax Consequences: Transferring assets to an irrevocable trust may trigger gift taxes, and the trust itself may be subject to separate tax filings.
4. Asset Accessibility: Assets in an irrevocable trust are no longer under your direct ownership, making it challenging to access funds if needed.
5. Inflexible Terms: The terms of the trust, once set, cannot be easily modified, potentially causing unintended consequences in the future.
6. No Personal Use: You cannot use assets in an irrevocable trust for personal benefit, limiting your access to trust property.
7. Loss of Step-up in Basis: Assets transferred to an irrevocable trust may not receive a step-up in basis upon the grantor's death, leading to increased capital gains taxes for beneficiaries.
8. High Legal and Administrative Costs: Establishing and maintaining an irrevocable trust can involve significant legal fees and ongoing administrative expenses.
9. Possible Trustee Disputes: Conflicts may arise between beneficiaries and trustees, especially if the trustee's decisions are perceived as unfavorable.
10. Lack of Flexibility: Changing circ*mstances or unforeseen events may render the terms of the irrevocable trust less suitable over time, limiting the trust's adaptability.

Knowing which type of trust is best for your individual situation is an integral part of planning for the future.

At , we help you determine the best trust for you in order to plan for life’s eventuality. Let us help you. We at Doane & Doane combine big firm resources and experience with the personal touch of a small, boutique firm. We pride ourselves on offering the kind of one-on-one attention that clients at big firms often do not enjoy.

After almost two decades of practice, we have earned the reputation as one of West Palm Beach’s most prominent tax and estate planning law firms . In particular, we understand that estate and probate matters involve a great deal of emotion. We are privileged to help clients on such important matters, and we genuinely care for and support our clients and their families.

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The information in this blog post is provided for informational purposes only and is not intended to be legal advice. You should not make a decision whether or not to contact an attorney based upon the information in this blog post. No attorney-client relationship is formed nor should any such relationship be implied. If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.