What are the differences between a revocable trust and an irrevocable trust?
I am considering a trust for my family and am not sure what type of trust to get. What are the differences between a revocable trust and an irrevocable trust?
Joshua Escalante Troesh, CFP | MBA
In simplest terms, a revocable trust is one which can be changed by the creator of the trust. The creator can take assets back from the trust, can change the beneficiaries of the trust, or can change any of the terms within the trust at any time they wish. An irrevocable trust, however, cannot be changed once it is established. Generally, if you have needs which require a trust your financial situation will also require getting professional advice on a trust.
What Determines the Trust’s Status?
Establishing a revocable or irrevocable trust isn’t a matter of checking a box or stating whether the trust is revocable or irrevocable. The language of the trust, and the rights the grantor retains, determine the status of the trust. So an “irrevocable” trust which gives the grantor too much control over the trust assets will actually be a revocable trust. What you call the trust is mostly irrelevant.
With an irrevocable trust, the terms of the trust are effectively set and any assets placed in the trust must remain the in trust. The executor could have the ability to sell an asset, but the proceeds must stay within the trust or be distributed to the beneficiaries according to the trust terms. The creator basically loses control of the assets beyond the controls which were originally established within the trust document.
Choose Carefully
The choice between a revocable and irrevocable trust is an important one, and you should seek the advice of both an estate attorney and likely a fiduciary financial adviser before establishing either type of trust. The choice you make (through the language in the trust) will impact other financial planning areas such as how the IRS views the assets in the trust for taxation purposes and how the assets within the trust are counted when trying to qualify for government programs like Medicaid, Social Security, or student financial aid
An attorney is required to draft a trust, as it is a legal document. But estate attorneys provide more than simple document drafting. There are also be legal implications, such as creditor protection, which are important to understand. An attorney can help you explore the legal implications and make better choices for yourself and your family. An attorney may also provide guidance on establishing more than one trust to meet different specific goals you have.
Additionally, you should carefully choose which assets to place within the trust. While an estate attorney will be vital to drafting the appropriate language and providing legal advice, most attorneys do not have expertise in analyzing financial and other assets nor in understanding the intricacies of the tax code. Depending on your goals for the trust(s), you may benefit most from placing assets with specific financial characteristics into specific trusts. These characteristics may include the tax treatment of the asset, tax strategies available, the expected growth rate of the asset, the level of income generated by the asset, the liquidity and marketability of the asset, risk factors associated with the investment and more. If you are considering a trust you can schedule a Discover Meeting for a second opinion on the assets to place in trust.