Revocable vs. irrevocable trusts: What you should know

You might think trusts are only for ultra-wealthy people. But in reality, trusts can be a part of estate planning for people at many different income levels. And understanding the types of trusts and how they work can help you decide if a trust makes sense for you. 

Learn more about the two main categories of trusts—revocable and irrevocable trusts—and how they differ. 

Key takeaways

• A trust is a legal agreement that dictates the ownership, management and transfer of assets. Trusts are often used as a part of estate planning. 
• There are two main types, revocable trusts and irrevocable trusts.
• Revocable trusts can be changed or revoked during the grantor’s lifetime.
• Irrevocable trusts typically can’t be changed or revoked except by court order or a legal process known as decanting. 
• Revocable trusts and irrevocable trusts also have different tax implications, rules about trustees and more. 

A trust is a legal arrangement that dictates the ownership, management and transfer of assets. Those assets might include money, real estate, stocks, personal belongings and more. 

Trusts are often used as a part of estate planning. So when a person dies—or is unable to make decisions due to illness, injury or aging—their assets can be managed and passed on to their heirs according to their wishes.

Each state has its own laws about trusts. So it’s important to understand your state’s rules and requirements about trusts. But no matter what state you’re in, all trusts create a fiduciary relationship between three parties:

• The grantor is the creator of a trust who typically owned the assets that were put in the trust.
• The trustee is an individual, group of individuals or a financial institution that manages the trust and administers it to the beneficiaries. Trustees are fiduciaries, which means they have a legal responsibility to always act in the best interests of the beneficiary. 
• The beneficiary is the person who receives assets and benefits from the trust. There can be multiple beneficiaries of a single trust.

Now you know the basics about what trusts are and how they work. Next, it’s important to understand the two main types of trusts: revocable and irrevocable trusts. 

What is a revocable trust?

A revocable trust—sometimes referred to as a living trust—is a type of trust that can be updated or revoked by the grantor after it’s created. 

With revocable trusts, the grantor can name themselves as the trustee of the trust. That means that they can still access and liquidate assets in the trust without going through a third party. 

And because the grantor continues to have access to the assets in their trust, the assets remain part of the grantor’s taxable estate. That means revocable trusts are subject to state and federal estate taxes. 

The grantor is also responsible for paying income taxes on the assets in the trust. Plus, revocable trusts may also be subject to creditor claims and legal judgments. 

Once the grantor dies, a revocable trust automatically becomes an irrevocable trust.

What is an irrevocable trust?

After it’s created, an irrevocable trust generally can’t be easily changed or revoked. Typically, only a court order or decanting—a legal process that transfers an existing trust to another—can make changes to an irrevocable trust.

Unlike a revocable trust, assets in an irrevocable trust are generally removed from the grantor’s taxable estate. The grantor no longer has control over or access to the assets in the irrevocable trust. And the trust itself—not the grantor—is typically responsible for paying any applicable income tax.

Irrevocable trusts often aren’t subject to estate taxes either. And irrevocable trusts are also protected from creditor claims and legal judgements. 

Here are a few key differences between revocable and irrevocable trusts:

There are potential benefits and drawbacks to any kind of trust. One benefit is that establishing a trust can help people specify how and when their assets are distributed to their beneficiaries. And that can help simplify managing family finances after a death.

Trusts are also much less likely than wills to have to go through the probate court process. That can help beneficiaries avoid probate fees, keep family matters private and make estate settlement faster. 

There are also some benefits to consider that are specific to revocable or irrevocable trusts: 

Pros of a revocable trust

People may create a revocable trust if they’re looking for a straightforward way to use a trust for estate planning. Common reasons people might consider a revocable trust include:

• Maintaining control over the assets in the trust by naming themselves as trustee  
• More easily making changes to the terms of the trust

Pros of an irrevocable trust

People may want to establish an irrevocable trust for a couple main reasons:

• Minimizing estate taxes for the beneficiaries and income taxes for the grantor
• Protecting assets from potential creditors or lawsuits

Estate planning can be daunting, but it can be an important part of managing your family finances and maintaining financial security. And learning about the tools you have at your disposal—like revocable and irrevocable trusts—is a good first step.

And remember, each state has its own rules and regulations about trusts. So before you make any decisions about establishing a revocable or irrevocable trust, it’s important to understand how trusts work in your state.