Clients with many assets often worry if these will be distributed according to their wishes after they die. When it comes to estate planning, the subject of setting up a trust is bound to be raised by your client. So, between an irrevocable and a revocable trust, which should you recommend?
These days, it’s not unusual for a client to use a trust instead of a will for their estate planning. Trusts offer a range of benefits, including asset protection, privacy, and efficient distribution of assets. But before choosing between a revocable or irrevocable trust, it’s essential to understand their key differences and benefits.
In this article, we discuss these and other pertinent issues surrounding the revocable and irrevocable trust, so you can have all the information you need to make informed estate planning decisions.
A trust is a legal document giving its owner or another assigned person or entity the authority to hold and manage the assets of the trust owner for their benefit. The granted authority may also be for the benefit of another person.
Trusts can have many uses. They can be used as tools for:
Much like a will, a trust is created via a written document. Unlike a will, which is used to give property away after one's death, a trust can manage and invest money and property while its owner is alive or after they die.
Also, property placed into a trust does not have to go through probate which can be time-consuming, very expensive and very public.
In general, the trustee must follow the terms of the trust document. The document includes details such as:
A revocable trust, or revocable living trust (RLT), is a flexible estate planning tool. With a revocable trust, the grantor can make changes like cancelling certain provisions of the trust at any time as long as they are of sound mind.
Grantors can, for example:
Oftentimes, the grantors name themselves as the trustee of the revocable trust, allowing them to use and control their own property or money while they’re alive. Should a grantor choose this path, they should name their successor trustee who will administer the trust once they’ve died or become incapacitated.
After the grantor dies, their trust becomes an irrevocable trust, so it cannot be modified or revoked. Should this happen, their named successor trustee should follow the grantor’s instructions in the trust document and distribute the trust assets.
Who owns the property in a revocable trust? The trust owns the property or assets, even if the grantor is still living. However, the grantor still has control of the assets in a revocable trust, as opposed to them losing control in an irrevocable trust.
Should your clients consider a revocable living trust as their estate planning tool? Let’s look at the advantages and disadvantages of revocable living trusts.
Here are some of the advantages:
Probate is the process of administering:
In the case of having a revocable living trust, probate is unnecessary.
Creating a revocable trust helps; probate can be a long, time-consuming process. The worst part about probate? It doesn’t afford privacy for the deceased and their beneficiaries. The public can also peer into the assets.
Another undesirable feature of probate is that it can be very expensive, especially in California. But if your client elects to have a revocable living trust in place, the trust remains in force after they die.
As grantor, your client has the power to specify how assets should be distributed when they create the trust.
Remember how a revocable trust makes probate unnecessary? Since there is no probate, the local courts do not have access to any document, like a will. No documents, no public records – nothing reaches the prying eyes of the media.
If your client, the grantor, loses the capacity to make decisions for themselves, a revocable trust protects their interests. One of the necessary provisions in a revocable trust is the assignment of a successor trustee.
The successor trustee takes control of the assets if the grantor is incapacitated and carries out the instructions outlined in the trust document.
When a grantor sets up a revocable trust, they can transfer assets in the trust that belong only to the grantor and/or the beneficiaries. This means that they can have assets that are separate from their marital property.
In the event of a divorce, these trust assets remain intact if the trust was established before marriage. Remember though, those who attempt to use this maneuver to conceal assets and defraud their spouse will have consequences.
Here are some of the downsides to having a revocable trust:
It takes more time to create a revocable trust than to write a will. Setting up a trust requires a lot of work, including re-titling all the assets that are to be placed into the trust. Assets that are not re-titled as trust assets can be subject to probate.
Compared to irrevocable trusts, revocable trusts offer little to no protection from creditors. While the grantor has some control over the trust assets, courts can attach trust assets to pay a judgment debt.
However, in California, the amount they can collect is limited to the distributions the debtor/beneficiary is entitled to receive from the trust.
Although a revocable trust can protect assets to some extent, it offers no tax benefits at all.
Since the grantor is still alive, they retain some control over the trust assets and any income generated passes through them. Any income earned by the trust assets is reported on the grantor’s income tax returns.
An irrevocable trust, as their name implies, is a trust that cannot be cancelled or changed without a court order and/or approval of all the beneficiaries. In an irrevocable trust, the grantor gives up control of assets placed in the trust. But unlike a revocable trust, the grantor does not have free rein to change the trust.
Changes made to an irrevocable trust are only possible via an agreement signed by the trustee and the beneficiaries or with a judge’s approval.
There are several types of irrevocable trusts; the most common of which are:
Each irrevocable trust can be further classified as either:
There is some value to having an irrevocable trust, but there are some disadvantages too. Let’s look at both sides for a balanced view on how irrevocable trusts can help (or hinder) your client’s financial goals.
Here are the pros to having an irrevocable trust:
As with revocable trusts, there is no probate once the grantor dies. The court does not gain access to the trust document, and so there can be no disclosure of the assets to the public. In short, irrevocable trusts afford privacy to the grantor and their beneficiaries.
Attorneys, doctors, and real estate developers are among the professions prone to lawsuits. Their assets may be seized by the courts to pay creditors. But if they place their assets in an irrevocable trust, these are beyond reach of the courts, protecting these assets from creditors.
While the federal government estate tax only applies to assets valued at $13.61 million in 2024, some states levy estate taxes on smaller estates. Estate taxes can range from 18% to 40%. Placing assets in an irrevocable trust can help grantors minimize estate taxes by reducing their taxable estate.
Federal tax exemptions can also change and shift to lower thresholds over time, so re-titling substantial assets into a trust is worth considering for estate planning.
As the irrevocable asset protection trust takes assets away from your client’s estate, it lowers their income and places them within the eligibility threshold for long-term medical care, such as Medicaid.
Here are some points to be wary of when looking at irrevocable trusts:
As the assets are placed in a trust, your client (the grantor) gives up all control over them. This can be especially difficult if your client worked hard to acquire those assets. Make sure your client understands the implications before they decide to place the assets in an irrevocable trust.
Your client may find it difficult to find someone they can rely on to carry out their wishes. If they have any misgivings about the trustee, they can appoint a trust protector to oversee the administration of the trust.
A trust protector can:
The grantor can outline the powers of a trust protector when they create the trust document.
Trust provisions are often difficult to understand and carry out. Your client should speak with an estate planning lawyer to make sure they are aware of all the details and implications of the irrevocable trust.
The last thing you want is for your client to agree to an irrevocable trust without fully understanding its effects, then regretting it later. Remember, once put into action, an irrevocable trust cannot be changed by the grantor!
Irrevocable trusts are called “irrevocable” for a reason – once enacted after the grantor (your client) dies, there is no way to change the trust’s terms. More specifically, beneficiaries cannot be removed or changed, and the grantor cannot regain control of the assets even if it was a living trust.
The main difference is that the terms of revocable trusts can be modified while irrevocable trusts cannot. The only way for an irrevocable trust to be amended is to secure a court order and have all the beneficiaries and the trustee agree to the changes.
The table below shows the differences between the two types of trusts:
| Features | Revocable Trust | Irrevocable Trust |
| Making changes to the trust | Can be done at any time if grantor is of sound mind | Can only be made via court order, and trustee & beneficiaries agree to changes |
| Protection from Creditors | No protection from creditors; courts can order liquidation of assets to satisfy judgment and pay creditors | Assets are not accessible by creditors or court order |
| Taxes on assets | Subject to state and federal taxes | Assets not subject to tax after grantor’s death |
| Difficulty in setting up | Not difficult; can be done without a lawyer | Difficult to set up; a trust lawyer is required |
| Privacy | No probate, trust does not become public record | No probate, but trust becomes public if there are legal issues |
| Access to assets | Grantor retains control of assets, receives income from the assets | The trust takes control of assets; assets and income not accessible even in an emergency |
Make sure that your client fully understands the advantages and disadvantages of each type of trust before they choose and get the ball rolling. Remember to consider their wishes for their heirs and remind your client that a revocable trust can be converted to an irrevocable trust.
Should they choose a revocable trust, they must be certain about the terms, since the trust turns into an irrevocable one after they pass on.
Here’s a video on the pros and cons of revocable and irrevocable trusts:
Here’s an in-depth look at irrevocable trusts and what they’re best used for.
Choosing between a revocable or irrevocable trust is a matter of weighing their benefits and drawbacks. When deciding on which trust to recommend, consider your client’s time horizon, wishes for their heirs, and estate planning goals.
Make sure that your client fully understands the impact of placing their assets into a trust. And remember, discussing what happens to your client’s family after they pass on can be a very sensitive topic. Having a comprehensive estate plan gives your client peace of mind, knowing that their wealth and family will be in good hands after they are gone.
Read and bookmark our Retirement Planning page for more on retirement planning, estate planning, and other retirement savings tools.
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