Revocable vs Irrevocable Trusts [Top Pros and Cons]

Understanding Revocable vs. Irrevocable Trusts: Which One Should You Choose?

To begin to understand revocable vs. irrevocable trusts, you first need to know what a trust is AND how it works.

This article will review some trust basics and then dive into the pros and cons of revocable vs. irrevocable trusts for you or your favorite clients.

Trust Basics: What Is a Trust?

A trust is an agreement used to accomplish any number of goals. The PARTIES to a trust agreement are:

• The trustmaker, trustor, settlor, or grantor (the person creating the trust)
• The trustee or successor trustee (the person managing the trust)
• The beneficiary or beneficiaries (those who receive benefits from the trust)
• The trust protector (if one is appointed)

As the names suggest, if you create a trust, you as the trust maker would be party #1 AND you would need to appoint a trustee (#2). Irrevocable trusts require an independent trustee (someone who isn’t you) located in the jurisdiction where the trust is filed (the situs of the trust). With a revocable trust, you can serve as your own trustee.

You would also designate who the beneficiaries (#3) are in the trust document. Most of the time, children (or adult children) are the designated beneficiaries. Although, some states allow “self-settled” trusts which allow you to set up an irrevocable trust naming yourself as beneficiary.

You might also appoint a trust protector (#4) to ensure that if changes need to be made to the trust document itself, and you aren’t allowed to make them, the trust protector could do so at your direction.

Basic Goals for Any Trust Agreement

• Probate avoidance
• Disability planning
• Asset protection
• Estate tax planning
• Gifting to younger generations with control
• Pre-Medicaid planning

Revocable vs. Irrevocable Trust Agreements: The Key Differences

Revocable Trusts

The revocable trust, aka living trust or inter vivos trust, can be revoked after it has been created. It can be easily amended to make changes, such as modifying trust beneficiaries or changing the trustee and successor trustee, simply by amending the existing living trust.

Important characteristics:

• NOT a separate legal entity from the trustmaker
• NOT assigned a separate tax ID number
• Operated with the trustmaker’s social security number
• Can be easily terminated or amended at any time while the trustmaker retains capacity
• Trust assets may be transferred easily both IN and OUT of the revocable trust

Irrevocable Trusts

An irrevocable trust CANNOT be revoked after it has been created.

Important characteristics:

• A separate legal entity from the trustmaker
• Assigned an independent tax ID number and closely scrutinized for tax purposes
• Cannot be terminated after they are established
• Transfers of trust assets are restricted
• Cannot be easily amended (changed) or revoked due to their restrictive nature, although some safeguards may be implemented to add flexibility

Both types of trusts can be very useful for a variety of estate planning strategies, but the goals applied to each type of trust are very different.

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Estate Planning Benefits: Revocable vs. Irrevocable Trusts

Probate Avoidance

Originally, the concept of a trust originated in England to avoid the probate system run by the church. The trust system was created to allow a separate entity to hold estate assets and pass them to beneficiaries, creating a successful way to avoid probate.

Today, probate administration varies between states but remains a costly and time-consuming alternative to using a trust in a process called trust administration.

Probate is a public process that requires the appointed personal representative of the estate to hire a probate attorney in almost every case. Often, someone made a will thinking it was sufficient, but before property goes into a testamentary trust, it must still be probated.

Both revocable and irrevocable trusts avoid probate, allowing for a private process run by the successor trustee, providing privacy and expedited distribution of assets when necessary.

Disability Planning

Disability planning can be accomplished with both revocable and irrevocable trusts. Special needs trusts are often used for those on SSI disability and may be created as a standalone irrevocable trust OR as part of a revocable trust to become effective upon the trustmaker’s death.

Disability planning with a trust should go hand in hand with other documents such as a durable power of attorney. Many states also allow a pre-need guardianship appointment, which is critical in disability planning.

Medicaid Planning

Revocable trusts can be used for pre-Medicaid planning by administering assets to maximize qualification for Medicaid and SSI disability benefits.

Irrevocable trusts offer more powerful Medicaid planning options. For example, assets may be “gifted” to an irrevocable trust and transferred outside the estate. This strategy can:

1. Reduce the size of the grantor’s estate to enhance qualification for “need-based” Medicaid benefits without having to “spend down” estate assets
2. Allow for income payment while enabling qualification under Medicaid income rules

Important: Transfers to non-spouses are reviewed under state Medicaid laws, with a 5-year lookback period in most jurisdictions (36 months in some states like California). Penalties will result if transfers for less than fair market value are discovered during the Medicaid application process.

Asset Protection

Revocable and irrevocable trusts offer asset protection benefits in different ways:

Revocable living trusts ONLY offer asset protection benefits following the death of the trustmaker. They provide asset protection for beneficiaries after the trust becomes irrevocable upon the death of the last surviving trustmaker.

Irrevocable trusts are already separate and independent entities from the trustmaker, making them ideal places to “park assets” intended to be beyond the reach of creditors. If a judgment is entered against you personally, you can rightfully claim that the trustee has no authority to release the assets—especially effective if the beneficiary is not you but your children or other heirs.

The level of asset protection depends upon the laws of the jurisdiction regulating the trust. This is why certain locations are classified as asset protection havens:

Offshore asset protection trusts (in Nevis, Lichtenstein, Puerto Rico, etc.) offer protections theoretically beyond the reach of U.S. Courts. However, the trustmaker can still be held in contempt in the U.S. and jailed for refusing to disclose trust assets. These trusts are typically more expensive and sought by those with larger estates.

Domestic asset protection trusts (in Nevada, Alaska, Wyoming, South Dakota, or Delaware) are governed by state laws that support anonymity and protection. A court in a less favorable jurisdiction may be obliged to apply the laws of the trust’s location, potentially resulting in greater creditor protection.

Estate Tax Planning and Gifting

Revocable trusts are NOT useful for gifting since they’re not separate legal entities. However, they are used for spousal planning and minimizing generation-skipping taxes (GST). For many years, revocable A-B trusts have helped spouses take full advantage of estate tax exemptions.

Irrevocable trusts ARE subject to gifting rules because they’re recognized as third-party entities. Assets transferred to them can appreciate OUTSIDE of the trustmaker’s estate, not subject to federal estate taxes.

Gifting limits to know:

• Lifetime gift tax exclusion (2025): $13.99 million per individual, $27.98 million for married couples
• Annual gift tax exemption: $19,000 per beneficiary, to any number of beneficiaries

Types of Irrevocable Trusts for Tax Planning

Irrevocable Life Insurance Trusts (ILIT) or “Wealth Replacement Trusts” allow you to gift to children with CONTROL reserved to parents. Annual gifted proceeds can fund a permanent cash value life insurance policy that accrues cash value and death benefits outside the trustmaker’s estate.

Charitable Trusts provide substantial income tax, capital gains, and estate tax savings:

• Charitable Remainder Trusts: Allow income-producing assets to pay income during a specified period, with the remainder passing to charity without estate taxes
• Charitable Lead Trusts: Provide income to charity based on a specified formula, with remaining assets passing to beneficiaries free of estate taxes

Charitable trusts may be structured as annuity trusts (CRAT/GRAT) or unitrusts (CRUT/GRUT), depending on how income payments are calculated.

The Significance of Trust Funding

When assets are placed in the title name of a trust, this process is called trust funding. Generally, irrevocable trusts are funded as a matter of course because they’re created for specific purposes. Revocable trusts, however, are often neglected because people assume they’re already funded.

Remember: An unfunded trust is a useless empty shell that benefits no one.

Conclusion

All of these strategies are complicated, and results can vary widely depending upon your specific objectives. These topics should be considered general information, not specific recommendations. A proper trust strategy warrants an in-depth fact-finding discussion with a qualified professional.

Visit our Wills and Trusts Learning Page for More State-Specific Guidance.