The differences between revocable trust and irrevocable trust 

When it comes to estate planning, advisors and investors have a valuable tool in the revocable trust (or living trust) and irrevocable trust. Both types of trusts offer their share of benefits and drawbacks, which means advisors and investors should choose carefully.  

While both types of trusts have similar benefits like avoiding probate and reducing tax burdens, these trusts have nuances that must be seriously considered, as these can impact investors’ financial goals. 

In this article, InvestmentNews gets into the differences between revocable and irrevocable trusts, so investors can make informed decisions.  

Revocable trust vs irrevocable trust 

A living trust and revocable trust are essentially the same. Both terms refer to a trust that allows for modifying the terms and beneficiaries of the trust while the grantor (creator of the trust) is still alive.  Meanwhile, an irrevocable trust is a trust that cannot be changed nor revoked once created.  

The only possible instances that an irrevocable trust may be amended or revoked is after getting the beneficiaries’ consent and securing a court order, or even both.  

A trust is a legal entity that a person uses to protect their assets and is set up during its creator’s lifetime. In most cases, a third party or person called a trustee, is assigned by the grantor to manage the assets in the trust.  

An irrevocable trust can be amended or revoked, but only if all the beneficiaries agree and/or there is a court order. One possible scenario where an irrevocable trust must be amended or revoked is if it no longer suits the needs or interests of the beneficiaries.  

Is there a difference between a “living trust” and a “trust”? 

There is no difference between these two terms. The term “trust” can be used as a general term for trusts, including: 

• living trusts 
• joint trusts 
• spendthrift trusts 
• special needs trusts 

Regardless of whether they are revocable or irrevocable, trusts are legal entities created to manage their creator’s assets.  

The person or other legal entity (i.e. a bank, law firm, or trust company) who is assigned to manage the assets is called a trustee. It’s their job to manage the assets in the trust that prioritizes the beneficiaries’ interests. This is known in the finance profession as the trustee’s fiduciary duty. Why is the fiduciary duty important? For one, there are legal consequences for not adhering to the fiduciary standard – even if the fiduciary violation is by neglect or mistake.  

What is the best type of trust? 

There is no one-size-fits-all type of solution when it comes to selecting a trust. Here’s what investors or advisors should figure out first before deciding on which trust to use:  

• identify the client’s financial goals 
• determine the budget 
• set the time horizon 
• weigh the pros and cons of each type of trust 

• determine the needs of the client and the needs of their beneficiaries 

Once you’ve made an outline of why your client needs a trust, i.e. made an estate plan, consult an attorney if appropriate. The best type of trust is one that fits the client’s financial needs, goals, time horizon, budget, and works for the beneficiaries. Only then can you recommend any of the revocable or irrevocable trusts.  

Here’s a short video explaining the main differences between a revocable and irrevocable trust. It also explains the main components necessary for drafting a trust. Check out the video to know the pros and cons of each before deciding on either trust. 

Trusts vs wills 

Some clients may wonder whether they should use a trust or a will to manage their assets. The answer to this depends on factors like:  

• the size of their estate 
• their financial goals 
• whether they want to keep assets private 
• when they want to manage or distribute the assets 
• how they want to manage their assets 
• when they want to distribute their assets 

For example, a client’s estate may benefit from a trust in that the assets can be protected if it’s a revocable trust. If the client works in a profession that is susceptible to lawsuits (i.e., doctors, lawyers, accountants, real estate agents) then an asset protection trust might be preferable to a will. A will cannot protect assets from the reach of creditors, or court rulings arising from divorce or malpractice suits.  

Trusts also have the benefit of bypassing the probate process – assets held in the trust are kept private and do not enter public records. Information like the amount and type of assets, their monetary value, and the beneficiary of the trust do not become public.  

Wills take effect after the grantor’s death. Trusts can work during the lifetime of the grantor and even well after they have died, depending on the terms of the trust and the grantor’s wishes. 

There is no rule that says that an investor cannot use both a trust (whether revocable or irrevocable) and draft a will – it is only a matter of choosing what fits their needs.  

So, when choosing between a revocable and irrevocable trust, advisors and investors should consider each trust’s features that align with their financial goals. This includes the ease and cost of setting up, the ability to modify the trust, and the tax benefits. 

While both the revocable and irrevocable trust avoid probate, there are important nuances to each type of trust. Don’t forget to seek the opinion of experts regarding this issue right here on InvestmentNews.