There are many differences between revocable and irrevocable trusts. When choosing between these two types, it all boils down to preference. Do you prefer having control or protection?
Revocable trusts: Flexibility and control
When you establish a revocable trust, you essentially create an estate tool that:
- You can change at any time: You can add or remove assets, change beneficiaries or even tear up the whole arrangement if it no longer suits your needs.
- Allows you to maintain your daily financial life: You can still buy and sell property, manage your investments and use your money as you always have.
- Does not require complicated tax filing: The IRS treats these assets as yours for tax purposes, so there’s no complicated tax filing system to learn. You will only need to report income on your personal tax return just as before.
The only drawback is that a revocable trust doesn’t protect your assets from creditors during your lifetime. Since you maintain control, those assets are still legally under your ownership. This means they are available to satisfy debts or judgments against you.
Irrevocable trusts: Protection at the cost of control
When you place assets in this type of trust, you’re essentially giving them away—not to a person, but to the trust entity itself. This means you generally can’t change your mind later or reclaim those assets. While it sounds like a disadvantage, it can come with certain benefits:
- Creditor protection: Since you do not technically own these assets, they’re typically protected from your creditors. They will also not count toward your taxable estate when you pass away.
- Qualification for government benefits: Worried about potential nursing home costs? You can structure certain irrevocable trusts to protect assets while potentially allowing you to qualify for Medi-Cal benefits.
The management of an irrevocable trust generally falls to an independent trustee. While you can provide guidance in the trust document, the trustee must make decisions based on the trust’s terms, not your current wishes. That is why setting up an irrevocable trust takes more commitment, as well as more careful planning and wording.
Making the right choice
The right choice depends entirely on your personal circumstances. Rather than settling for standard documents or templates, work with an attorney who takes the time to understand your specific needs. This ensures that your trust and overall estate plan can meet your goals fully.